Default Waterfall Models

Default Waterfall Models are the hierarchical order in which an exchange uses different sources of capital to cover losses during a major trader default. The first layer is usually the defaulting trader's own margin.

If that is insufficient, the exchange's insurance fund is tapped. If the insurance fund is exhausted, the final layers might include the exchange's own capital or, in extreme cases, the profits of other traders.

This model provides a clear path for loss absorption, ensuring that the market continues to function. It is designed to contain the impact of a single failure.

Traders should understand the waterfall of their chosen exchange to evaluate their exposure.