Define the Term “Systemic Risk” in the Context of a Highly Leveraged Derivatives Market

Systemic risk is the risk of collapse of an entire financial system or market, as opposed to the failure of an individual entity. In a highly leveraged derivatives market, systemic risk arises because the failure of one large counterparty or a cascade of liquidations can trigger widespread defaults and panic across the entire ecosystem.

The interconnectedness of leveraged positions amplifies the potential for contagion.