Explanation

The correct order of the CCP (Central Counterparty) loss waterfall is:

II, I, III - Option B

Breakdown of the CCP Loss Waterfall:

1. II. Defaulting member's collateral and default fund contributions are exhausted

   • First, the CCP uses the defaulting member's own resources (initial margin/collateral and default fund contributions)
   • This is the first line of defense

2. I. Non-defaulting member's default fund contributions are exhausted

   • If the defaulting member's resources are insufficient, the CCP then uses the default fund contributions of non-defaulting members
   • This represents mutualized risk sharing among members

3. III. CCP taps an amount of its equity that enables them to function normally

   • Only after member resources are exhausted does the CCP use its own equity
   • The CCP typically retains some equity as a final buffer to ensure continued operation

Why this order matters:

• The waterfall structure ensures that the defaulting member bears the first losses
• Then the mutualized default fund absorbs losses
• CCP equity serves as the ultimate backstop to maintain market stability
• This sequence protects the CCP from insolvency and maintains market confidence