What Is “Default Waterfall” in a Clearing House?
The default waterfall is the pre-defined, sequential order in which a CCP uses financial resources to cover losses resulting from a clearing member's default. It typically starts with the defaulter's margin, then the CCP's own capital, followed by the mutualized guaranty fund contributions from non-defaulting members.
This structured approach ensures an orderly absorption of losses.
Glossar
Default Waterfall
Sequence ⎊ This outlines the hierarchical order in which financial resources are applied to absorb losses when a clearing member defaults on its derivative obligations.
Guaranty Fund Contributions
Contribution ⎊ In the context of cryptocurrency derivatives, options trading, and broader financial derivatives markets, a contribution to a guaranty fund represents a periodic assessment levied on market participants ⎊ typically exchanges, clearinghouses, or regulated brokers ⎊ to establish a pool of capital designed to mitigate systemic risk.