What Happens during a Clearing Member Default Event at a CCP?
When a clearing member defaults, the CCP immediately uses the defaulter's posted initial margin and variation margin to cover losses. If these funds are insufficient, the CCP will use its own capital and then draw upon the pre-funded default fund contributed by all non-defaulting members.
The CCP then takes over the defaulter's positions and attempts to liquidate or auction them to minimize market disruption.
Glossar
Clearing Member
Intermediation ⎊ A clearing member, within cryptocurrency derivatives and broader financial markets, functions as a central counterparty, assuming credit risk and guaranteeing settlement of trades executed on an exchange or platform.
Clearing Member Default
Exposure ⎊ A clearing member default signifies the failure of a firm responsible for settling trades to meet its financial obligations, introducing systemic risk within cryptocurrency derivatives markets and traditional options exchanges.