Default fund
A default fund, also called a guaranty fund or clearing fund, is a pre-funded, mutualised pool of financial resources maintained by a central counterparty. Clearing members contribute to the fund, which is applied to cover default losses that remain after a defaulter’s own margin and default-fund contribution are exhausted. In most CCPs’ default waterfalls, the mutualised default fund sits after the defaulter’s resources and a tranche of the CCP’s own capital, and before any unfunded assessments or recovery measures.
Default funds are sized and maintained under regulatory standards. Globally, the CPMI–IOSCO standards require CCPs to hold sufficient pre-funded financial resources to withstand “extreme but plausible” conditions. In the European Union, EMIR Article 42 requires a pre-funded default fund with contributions proportional to members’ exposures and capacity to withstand at least the default of the largest member or, if larger, the combined default of the second and third largest. In the United States, systemically important DCOs and certain Subpart C DCOs must meet a Cover-2 minimum; assessments cannot be counted toward that minimum because it must be pre-funded.
Terminology and role
Many CCPs use the terms default fund, guaranty fund or clearing fund interchangeably. Regardless of label, the mechanism is the same: members mutualise residual default risk beyond the defaulter-pays layers. Under the CPMI–IOSCO framework, default-fund resources are part of the CCP’s pre-funded financial resources and are applied according to clear, pre-established rules in the default waterfall. CCPs’ public materials typically depict the order as: defaulter’s margin → defaulter’s default-fund contribution → CCP’s skin-in-the-game → mutualised default fund → unfunded assessments and, if needed, recovery or resolution tools.Sizing and calibration
Regulators expect default funds to be calibrated to withstand severe but plausible market stresses, often framed as Cover-1 or Cover-2 losses beyond margin. EMIR explicitly requires capacity for the largest exposure or, if larger, the second and third combined; U.S. rules set Cover-2 for SIDCOs and certain Subpart C DCOs. In practice, CCPs disclose that their guaranty/default funds meet the Cover-2 standard and are subject to frequent stress testing and buffers.Scholarly and official analyses describe how the default fund mutualises losses pro rata across surviving members once prefunded layers are exhausted, and contrast different calibration choices and buffers.