What Are the Different Layers of a Typical Default Waterfall?

A typical default waterfall consists of several layers, applied in a specific order. The first layer is the defaulting member's initial margin and their contribution to the default fund.

The second layer is the clearing house's own capital contribution ("skin-in-the-game"). The third layer comprises the default fund contributions from all non-defaulting clearing members.

Some waterfalls may have further layers, such as the ability to call for additional contributions from members if the default fund is depleted.