Clearinghouse Capital denotes the financial resources a clearinghouse holds, beyond participant margins, to absorb losses in the event of a clearing member’s default. Within the crypto market infrastructure, this capital acts as a critical buffer, safeguarding the integrity of transactions and maintaining systemic stability.
Mechanism
This capital is structured into distinct tiers, beginning with the clearinghouse’s own equity and retained earnings. It is supplemented by contributions to a default fund, often provided by clearing members. When a default occurs and the defaulting member’s margin is exhausted, the clearinghouse capital is drawn upon in a predefined sequence to cover any remaining obligations, preventing contagion.
Methodology
The methodology for clearinghouse capital provisioning centers on robust risk management and financial resilience. It involves stress testing to assess potential losses under extreme market conditions, including crypto price volatility and liquidity shocks. The objective is to ensure sufficient resources exist to mitigate systemic risk and facilitate the seamless operation of crypto derivatives and options trading.
Regulatory requirements for CCP skin-in-the-game mandate a capital contribution from the clearinghouse to align its risk management incentives with market stability.
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