Explanation:
The pool of resources contributed by all CCP members to act as a buffer against counterparty default is known as the default fund (also known as the clearing fund or guaranty fund). This mutualized pool is utilized during the default management process only after the defaulting member's own initial margin and default fund contributions, as well as the CCP's dedicated initial equity (skin-in-the-game), have been exhausted.
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Q.8 Mitigating the counterparty risk is essential to maintain liquidity and reduce systematic risk in the financial system. As an insurance against the counterparty default, all the central counterparty (CCP) members contribute specific resources to a pool that is used if the resources of the defaulting counterparty are insufficient to pay off the losses. Which of the following is the appropriate term used for this pool?
A
Variation margin.
B
Initial margin.
C
Novation fund.
D
Default fund.
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