US-European divergence over default funds
New regulatory standards require central counterparties (CCPs) to have robust processes in place to mitigate counterparty credit risk exposures. Risk management models must optimally determine the relative mix of initial margin and default fund contributions
Ignacio Solloa, deputy chief executive of Madrid-based central counterparty MEFF
Our philosophy has always been to have a relatively small default fund. We didn’t have a default fund until recently because our philosophy was to have a loss-sharing mechanism as small as possible. The risks have to be identified and covered by the risk-bearing member. If a member is producing risk, that should be covered by the collateral and the margins you require from that member. Only as a last resort should
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