Can a Clearing House Fail, and What Is the Protection Mechanism?
While extremely rare, a clearing house failure is possible under catastrophic market conditions. Protection mechanisms include a default fund, mutualized capital contributions from clearing members, and the clearing house's own capital.
These layers of defense are designed to absorb losses before the failure impacts the broader financial system.
Glossar
Protection
Countermeasure ⎊ Hedging strategies, such as purchasing protective puts or employing delta-neutral structures, serve as direct countermeasures against adverse price movements in crypto derivatives.
Clearing House Failure
Failure ⎊ A clearing house failure represents the inability of a central counterparty (CCP) to fulfill its financial obligations to clearing members.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Mutualized Capital Contributions
Mechanism ⎊ Mutualized capital contributions represent a risk-sharing framework within cryptocurrency derivatives, particularly prevalent in perpetual swaps and options protocols, where participants collectively collateralize positions rather than individual accounts bearing the full exposure.