What Is a “Default Waterfall” in the Context of a Clearing House?

A "default waterfall" is the sequential order in which a clearing house applies different financial resources to cover losses from a defaulting member. It starts with the defaulting member's own assets, including their margin deposits and contributions to the default fund.

Next, the clearing house's own capital is used, followed by contributions from the default fund made by non-defaulting members. This tiered approach is designed to ensure that the losses are contained and mutualized in a predictable manner.