What Is ‘Default Fund’ and Its Purpose in a Clearing House?

The default fund is a mutualized pool of capital contributed by all clearing members. Its primary purpose is to serve as a secondary line of defense against a member's default, after the defaulting member's own margin and the clearing house's capital have been exhausted.

By pooling risk, it ensures that the financial stability of the entire market is maintained, preventing a single failure from causing a systemic crisis.