How does the clearinghouse protect market participants against counterparty default?
The clearinghouse is made up of the clearing members of the Exchange who accept responsibility for all trades cleared through them. Orders are “cleared” because the clearinghouse ultimately acts as the buyer to every seller and seller to every buyer once a trade has been accepted by the Exchange Clearing members must also make a deposit to the guarantee fund of the clearinghouse. In the event a clearing member fails to meet a margin payment, funds would be appropriated from 1) that clearing member’s assets under Exchange control; 2) the Exchange’s surplus as determined by the board of directors; 3) the guarantee fund; 4) funds based on a pro-rated assessment of other clearing members.
