Chapter 04 · Section 4.1
Protection Against Default
Let us now establish how the protection against default works. The clearing fund is only used to settle clearing members'claims if other funds available were not sufficient.
Which of the following will be used (if available) before the clearing fund?
a) The defaulting clearing member's margin deposit.
b) Other clearing member's margin deposits.
The margin deposit is required in order to cover a possible loss on a clearing member's position.
If a clearing member fails to meet a margin call, his positions are liquidated by the clearing house before the loss is greater than the margin it has deposited.
Other member's margin deposits are only used if the clearing fund is not enough. (b) is therefore not correct.