What Role Does the Clearing House’s Own Capital Play in a Default Scenario?
A clearing house's own capital, often referred to as its "skin-in-the-game," is a specific layer in the default waterfall. It is typically used after the defaulting member's resources are exhausted but before the default fund contributions of non-defaulting members are touched.
This ensures the clearing house is incentivized to manage risks prudently, as its own funds are at stake. The amount of capital is predetermined and serves as a critical buffer to absorb losses and build confidence in the clearing house's resilience.
Glossar
Non-Defaulting Members
Membership ⎊ In cryptocurrency derivatives and options trading, Non-Defaulting Members represent participants within a structured financial framework, such as a decentralized autonomous organization (DAO) governing a protocol or a clearinghouse facilitating trades, who consistently fulfill their obligations and maintain the integrity of the system.
Clearing House Default
Contagion ⎊ The failure of a central clearing house in the derivatives market represents a severe systemic event, immediately threatening the novated obligations of all connected counterparties.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Default Fund Contributions
Purpose ⎊ Default fund contributions are financial commitments made by clearing members to a central counterparty CCP's default fund.