How Does the Clearing House Manage Systemic Risk Arising from Multiple Margin Calls?
A clearing house acts as the central counterparty for derivatives trades, guaranteeing performance. It manages systemic risk by imposing stringent initial and variation margin requirements, performing daily mark-to-market calculations, and utilizing a default fund.
When multiple margin calls are triggered, the clearing house liquidates the defaulter's positions in an orderly manner and uses the default fund to absorb losses, preventing a cascade failure across the market.
Glossar
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Default Fund
Fund ⎊ The Default Fund, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, represents a segregated pool of assets designated to cover potential losses arising from counterparty default.