What Is the “Skin-in-the-Game” Concept in Financial Regulation?

"Skin-in-the-game" is a principle in financial regulation that requires institutions to have their own capital at risk alongside their clients or members. In the context of a clearing house, it refers to the portion of its own capital it must contribute to the default waterfall.

The idea is that by having a financial stake in the outcome, the institution is more likely to be prudent in its risk management and to act in the best interests of the overall system. It aligns the incentives of the clearing house with those of its members and the broader market.