How Does the Clearing House’s Capital Contribution Affect Its Risk Management Incentives?

The capital contribution creates a strong incentive for the clearing house to maintain robust risk management practices. Since its own money is on the line in the event of a member default, the clearing house is motivated to set appropriate margin levels, conduct rigorous stress tests, and enforce its rules strictly.

If the clearing house were not at risk, it might be tempted to lower standards to attract more business, creating a moral hazard. The "skin-in-the-game" ensures that the clearing house bears a direct financial consequence for any failures in its risk management.