The Cover 2 Requirement stipulates that a Central Counterparty (CCP) must maintain sufficient financial resources to absorb losses arising from the simultaneous default of its two largest clearing members and their affiliates. This standard aims to ensure the CCP’s resilience against severe market disruptions.
Mechanism
This mechanism is supported by a robust default waterfall structure, which sequentially utilizes the defaulting members’ initial margin, the CCP’s own capital, and contributions from a mutualized default fund composed of non-defaulting clearing members’ resources. This structured application of capital prevents systemic contagion.
Methodology
For crypto CCPs, meeting the Cover 2 Requirement involves rigorous stress testing against extreme digital asset price volatility and correlated default scenarios, particularly concerning institutional options trading. The methodology assesses capital adequacy and ensures that the CCP possesses pre-funded resources to manage significant credit exposures, thereby safeguarding market stability.
Stress tests translate extreme market scenarios into precise capital requirements, ensuring a CCP's default fund can absorb catastrophic member losses.
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