How Does a Clearinghouse Handle a Member’s Default?
When a clearing member defaults, the clearinghouse immediately steps in to manage the situation to prevent market disruption. First, it uses the defaulting member's margin and collateral to cover losses.
If losses exceed this amount, the clearinghouse utilizes its own capital and then begins drawing from the mutualized default fund contributed by all members. The clearinghouse will also attempt to 'port' or transfer the defaulting member's positions to a solvent member or liquidate them in an orderly fashion.
Glossar
Clearing Member
Intermediation ⎊ A clearing member, within cryptocurrency derivatives and broader financial markets, functions as a central counterparty, assuming credit risk and guaranteeing settlement of trades executed on an exchange or platform.
Clearinghouse
Finality ⎊ A decentralized clearinghouse function provides near-instantaneous transaction finality by acting as the central ledger for trade confirmation and settlement across derivatives.