The past several decades have seen fundamental transformations in the size, structure, and liquidity of world financial markets. Equity markets have fluctuated in value (currently about $17 trillion for U.S. equities) and have introduced new products such as exchange-traded funds (mutual funds that trade like equities). Increasingly, structured equity products combine derivatives and cash market positions to manage equity risks. Debt markets have grown rapidly (currently about $26 trillion for the U.S.), with the greatest growth coming from mortgage- and asset-backed securitizations. Recently, credit derivatives (currently $26 trillion in notional value) have begun to supplement and even, in some instances, replace cash markets in debt. Derivatives markets, of which over-the-counter (OTC) interest rate swaps are by far the largest component, have grown to $284 trillion in notional value.

This article explores the functions performed by clearing and settlement institutions for financial markets, with a particular focus on derivatives, as opposed to securities, clearing and settlement. The nature of the counterparty credit risks that arise prior to settlement are essentially the same in both secondary securities markets and derivatives markets.