How Does the Clearing House Manage the Risk of a Major Market Participant Default? ▴ Learn

How Does the Clearing House Manage the Risk of a Major Market Participant Default?

The clearing house manages this risk through a 'default waterfall' of financial resources. First, the defaulting member's margin is used.

Second, the clearing house's own capital (skin-in-the-game) is used. Third, a portion of the non-defaulting members' contributions to the default fund is used.

Finally, the clearing house may have the authority to call for additional contributions or even reduce the settlement obligations (tear-up). This multi-layered defense ensures stability.

How Does a CCP Ensure Its Own Solvency?

What Happens If a Clearinghouse Faces a Major Default by a Member Firm?

How Does the Concept of ‘Waterfall’ Loss Allocation Work in a CCP?

How Does the ‘Waterfall’ Mechanism Protect a CCP against a Large Member Default?