A pool of contributions from clearing members used to cover losses beyond a defaulter's margin. It mutualises extreme losses among members.
Where you will meet it
Default fund comes up in 15 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“The CCP controls its own risk by admitting only well-capitalised clearing members, collecting initial margin, settling gains and losses daily through variation margin, setting position limits, and holding a default fund contributed by members.”
Derivatives FRM Part II · Credit risk measurement and management
“A CCP protects itself with initial and variation margin and a default fund.”
Central Clearing FRM Part I · Financial markets and products
“Risk is controlled by daily variation margin, initial margin sized to potential losses, a mutualised default fund and the CCP's own capital.”
Central Clearing FRM Part I · Financial markets and products
“A CCP does four jobs: it novates trades so that it faces each member, it guarantees performance by collecting margin and holding a default fund, it nets positions across members, and it runs a single default management process, usually an auction of the defaulter's book.”
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