In finance, the term central counterparty refers to a financial intermediary which provides market liquidity by buying assets sold by market participants and selling assets bought by market participants.
A central counterparty acts as a third party between a buyer and a seller in a transaction. Instead of two parties creating a contract directly between themselves, the seller enters into a contract with the central counterparty and the central counterparty enters into a contract with the buyer.
In some jurisdictions, over the counter (OTC) transactions must be made through a central counterparty to enable greater control of transactions by exchanges or government supervisory authorities.
Clearing houses normally assume the role of central counterparty in securities markets.