How Is the Size of the Default Fund Determined?

The size of a clearing house's default fund is determined through rigorous stress testing. These tests simulate extreme but plausible market scenarios to estimate the potential losses that could arise from the default of one or more members.

The fund is sized to be sufficient to cover the losses that would exceed a defaulting member's margin in these scenarios. Regulatory requirements also play a significant role, often mandating that the fund be able to withstand the default of the largest one or two members.