What Is the Risk of “Information Leakage” in a CEX’s Derivatives Clearing Process?

Information leakage in a CEX's derivatives clearing process is the risk that internal personnel or privileged external entities gain non-public knowledge about large, pending derivatives settlements, exercises, or collateral movements. This information could reveal a major directional bias or an impending large trade in the underlying asset.

This insider knowledge could then be exploited for internal front-running or for placing highly profitable trades on the spot market before the large derivative-related transaction is executed. Robust "Chinese Walls" are necessary to mitigate this risk.