How Do Central Clearing Counterparties (CCPs) Manage the Systemic Risks Associated with Cross-Margining?

Central clearing counterparties (CCPs) act as the buyer to every seller and the seller to every buyer, placing themselves in the middle of trades. They manage cross-margining risks by enforcing strict collateral standards and maintaining a default fund.

If a large clearing member defaults, the CCP first uses the defaulter's margin, then contributes its own capital, and finally draws from the default fund contributed by all members. This multi-layered defense system mutualizes the risk, preventing the failure of a single large entity from causing a systemic contagion and a market-wide death spiral.