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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management

A clearing member's client defaults on a futures position. Under the clearing corporation's risk framework, which fund is first applied after the defaulting member's own margins and deposits are exhausted?

After the defaulter's own margins and deposits are used, the clearing corporation's own contribution to the default fund is applied before non-defaulting members' contributions are touched. This ordering is the default waterfall, and the other options are not part of it.

  1. AThe clearing corporation's contribution to the default fund ('skin in the game') before non-defaulting members' contributionsCorrect
  2. BThe non-defaulting members' contributions to the default fund
  3. CThe investor protection fund of an unrelated exchange
  4. DThe client's brokerage account of another member

Explanation

Under the default waterfall, the defaulter's margins and its own default fund contribution are used first, followed by the clearing corporation's own contribution, and only then non-defaulting members' contributions. Other options are not part of the waterfall.

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