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.

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). 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). 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.