Default fund
A default fund, also called a guaranty fund or clearing fund, is a pre-funded, mutualised pool of financial resources maintained by a central counterparty (CCP). Clearing members contribute to the fund, which is applied to cover default losses that remain after a defaulter’s own margin and default-fund contribution are exhausted. In most CCPs’ default waterfalls, the mutualised default fund sits after the defaulter’s resources and a tranche of the CCP’s own capital (often called “skin-in-the-game”), and before any unfunded assessments or recovery measures.[1][2] Default funds are sized and maintained under regulatory standards. Globally, the CPMI–IOSCO standards require CCPs to hold sufficient pre-funded financial resources to withstand “extreme but plausible” conditions (commonly expressed as Cover-1 or Cover-2).[1] In the European Union, EMIR Article 42 requires a pre-funded default fund with contributions proportional to members’ exposures and capacity to withstand at least the default of the largest member or, if larger, the combined default of the second and third largest (a form of Cover-2 calibration).[3] In the United States, systemically important DCOs (SIDCOs) and certain Subpart C DCOs must meet a Cover-2 minimum; assessments cannot be counted toward that minimum because it must be pre-funded.[2] Terminology and roleMany CCPs use the terms default fund, guaranty fund or clearing fund interchangeably. Regardless of label, the mechanism is the same: members mutualise residual default risk beyond the defaulter-pays layers. Under the CPMI–IOSCO framework, default-fund resources are part of the CCP’s pre-funded financial resources and are applied according to clear, pre-established rules in the default waterfall.[1] CCPs’ public materials typically depict the order as: defaulter’s margin → defaulter’s default-fund contribution → CCP’s skin-in-the-game → mutualised default fund (non-defaulting members) → unfunded assessments and, if needed, recovery or resolution tools.[4][5] Sizing and calibrationRegulators expect default funds to be calibrated to withstand severe but plausible market stresses, often framed as Cover-1 (largest member) or Cover-2 (largest two member groups) losses beyond margin. EMIR explicitly requires capacity for the largest exposure or, if larger, the second and third combined; U.S. rules set Cover-2 for SIDCOs and certain Subpart C DCOs.[3][2] In practice, CCPs disclose that their guaranty/default funds meet the Cover-2 standard and are subject to frequent stress testing and buffers.[4][5] Scholarly and official analyses describe how the default fund mutualises losses pro rata across surviving members once prefunded layers are exhausted, and contrast different calibration choices (e.g., Cover-1 vs Cover-2) and buffers.[6] Contributions, mutualisation and replenishmentUnder EMIR, contributions to the default fund must be proportional to each member’s exposure and are re-calculated at regular intervals; CCP rulebooks specify how used resources are replenished to minimum levels by the next business day.[3][7] U.S. rules for SIDCOs prohibit counting unfunded assessments toward minimum prefunded requirements, reinforcing the emphasis on pre-funding for resilience.[2] Use in defaults and auctionsDefault funds backstop default management tools, especially auctions used to transfer or hedge the defaulter’s portfolio. CPMI–IOSCO guidance describes auction design, participation and incentives; CCP disclosures and presentations show the sequence in which defaulter resources, CCP capital and mutualised funds are applied during a default.[8][9] Recovery and resolution contextInternational work since 2014 addresses how much and what types of financial resources (including mutualised funds and potential SSITG) should be available in recovery and resolution if prefunded resources prove insufficient. The Financial Stability Board’s 2024 guidance sets out how authorities should assess adequacy of financial resources in resolution and the treatment of CCP equity.[10] In 2025, the Bank of England consulted on adding a “second skin-in-the-game” tranche (SSITG) aligned with the mutualised default fund in the waterfall, to further sharpen incentives and resilience.[11] ExamplesPublic disclosures by major CCPs illustrate common practices. For example, CME states that each service’s guaranty fund is sized to Cover-2 and subject to daily stress testing and buffers; Eurex explains that its joint Default Fund covers simultaneous defaults of the two largest clearing-member groups at a 99.9% confidence level, with monthly re-calibration of contributions.[4][5] See also
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