The strategy of replacing the defaulting member through an auction process is the most effective way to minimize the adverse impact on other members. In this scenario, the CCP immediately terminates all financial contracts with the defaulting member, thereby preventing any further losses. The positions of the defaulting member are then auctioned off to other members, usually by sub-portfolio, such as interest rate swaps. This allows other members to take over the positions of the defaulting member, often at favorable terms. This strategy is generally well-received by other members, as it allows them to potentially profit from the default without incurring any negative consequences. Furthermore, it ensures that the losses from the default are not distributed among all members through loss mutualization, which would have a more significant adverse impact.

Choice A is incorrect. Letting the defaulting member absorb the losses may not be feasible if the member is insolvent or lacks sufficient assets to cover the losses. This could potentially lead to a domino effect, where other members are affected by the default, thereby increasing systemic risk.

Choice B is incorrect. If CCP pays for all losses, it might deplete its own resources and compromise its ability to function as an intermediary in future transactions. This could destabilize the financial market and increase systemic risk.

Choice D is incorrect. Loss mutualisation involves spreading out a loss among all members of CCP which can negatively impact even those members who were not directly involved with the defaulting party. This can create moral hazard issues and discourage prudent risk management practices among members.