CCP Clearing and the Default Waterfall

Novation, initial and variation margin, the margin-call cycle, and the ordered loss-absorbing waterfall

CCP Clearing and the Default Waterfall Novation, initial and variation margin, the margin-call cycle, and the ordered loss-absorbing waterfall 01 / Clearing Members 02 / Central Counterparty 03 / Margin Engine 04 / Collateral + Settlement EX / Defaulter Resources EX / Mutualized Loss Sharing Novate Margin + call cycle Fund + settle Daily + intraday cycle Defaulter pays first Then the mutualized stack Trade Executed · bilateral order · Clearing Members › Novate Trade Executed bilateral order Novation · CCP interposes · Central Counterparty › Novate · buyer to every seller Novation CCP interposes buyer to every seller Initial Margin · future exposure · Margin Engine › Margin + call cycle · SPAN / VaR Initial Margin future exposure SPAN / VaR Variation Margin · mark-to-market · Margin Engine › Margin + call cycle Variation Margin mark-to-market Margin Call · intraday revalue · Collateral + Settlement › Daily + intraday cycle › Fund + settle Margin Call intraday revalue Collateral In · eligible + haircut · Collateral + Settlement › Daily + intraday cycle › Fund + settle Collateral In eligible + haircut Own Margin · IM + VM seized · Defaulter Resources › Defaulter pays first › Novate · layer 1 Own Margin IM + VM seized layer 1 Own Fund · default deposit · Defaulter Resources › Defaulter pays first › Novate · layer 2 Own Fund default deposit layer 2 CCP Capital · skin in the game · Mutualized Loss Sharing › Then the mutualized stack › Margin + call cycle · layer 3 CCP Capital skin in the game layer 3 Mutual Fund · survivors pooled · Mutualized Loss Sharing › Then the mutualized stack › Margin + call cycle · layer 4 Mutual Fund survivors pooled layer 4 Assessments · capped cash calls · Mutualized Loss Sharing › Then the mutualized stack › Fund + settle · layer 5 Assessments capped cash calls layer 5 novate fund member default Legend User UI Agent logic Policy Tool action Context / trace

One Risk Transformation

  • • Novation makes the CCP buyer to every seller and seller to every buyer
  • • Multilateral netting collapses the bilateral mesh
  • • Risk is concentrated in the CCP and mutualized across members

Two Kinds of Margin

  • • Initial margin covers potential future exposure and is held
  • • Variation margin settles realized mark-to-market moves in cash
  • • Intraday calls test funding, not just end-of-day solvency

Waterfall Is Ordered

  • • Defaulter's own margin and fund are consumed first
  • • CCP skin-in-the-game sits ahead of survivors by design
  • • Mutual fund and assessments are tail-event layers only

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