How Does the Clearing House Manage Systemic Risk in the Derivatives Market?

The clearing house manages systemic risk through several key mechanisms. First, it requires all members to post collateral (margin) to cover potential losses.

Second, it uses a default fund, a pool of capital contributed by all members, to absorb losses that exceed a defaulting member's margin. Third, it employs robust risk management models to monitor exposures and set appropriate margin levels.

By standardizing contracts and acting as the central counterparty, it prevents a default by one firm from triggering a cascade of failures across the market.