How Does a CCP Use a ‘Default Fund’ to Manage Systemic Risk?

A default fund is a pool of capital contributed by all clearing members of the CCP, acting as the final line of defense after the defaulting member's margin and the CCP's own capital have been exhausted. This mutualized capital is used to cover the losses from a large member default, preventing those losses from cascading into the broader financial system and thus managing systemic risk.