A pool of clearing member contributions used to absorb losses if a defaulting member's margin and capital are not enough.
It is the mutualised layer of the default waterfall, sitting after the defaulter's initial-margin and capital and before the clearing house's own contribution and any assessment powers.
The fund's existence is why the daily margin machinery is so strict: every clearing member is ultimately exposed to every other one's risk management, and they price and police each other accordingly.
Example: a clearing house might hold several billion dollars of member contributions sized so that the fund survives the simultaneous default of its two largest members under stressed conditions.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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