What Is the Definition of a “Solvency Event” for a Derivatives Exchange?

A solvency event for a derivatives exchange occurs when its total liabilities exceed its total assets, making it unable to meet its financial obligations, particularly covering losses from liquidations that result in negative equity. This is typically triggered by a catastrophic market event, such as a major stablecoin depeg or a massive, cascading liquidation event that depletes the insurance fund and leaves the exchange with a net loss that it cannot absorb.

It signifies the failure of the exchange's risk management system.