Explain the Concept of a Default Fund in a Clearinghouse

A default fund is a pool of financial resources held by a clearinghouse (CCP) to cover losses that exceed the defaulting member's initial margin and other collateral. The fund is typically composed of contributions from all clearing members, often in proportion to their risk exposure, as well as the clearinghouse's own capital.

It serves as a mutualized insurance mechanism, providing a critical layer of protection to ensure the market remains solvent even after a major member's default.