How Does a CCP’s Guarantee Fund Mitigate Systemic Risk?
A CCP's guarantee fund (or default fund) is a mutualized pool of capital contributed by all clearing members, designed to absorb losses from a defaulting member that exceed their posted margin and the CCP's own capital. By providing a deep financial buffer, the fund ensures that the CCP can continue to operate and guarantee all remaining trades, preventing the default from cascading into the broader financial system.
Glossar
Default Fund Structure
Purpose ⎊ The default fund structure defines the collective capital pool established by a central counterparty (CCP) and its clearing members to absorb losses from a defaulting member.
Guarantee Fund
Fund ⎊ A guarantee fund is a pre-funded pool of capital established by a clearing house to absorb losses that exceed a defaulting member's initial margin.