A clearing member defaults and closing out its book loses Rs 70 crore. Its initial margin is Rs 40 crore and its default fund contribution Rs 10 crore; the clearing corporation holds Rs 5 crore of its own capital in the waterfall and the other members' default fund is Rs 100 crore. Who bears what?

The defaulter's own resources cover Rs 50 crore, the clearing corporation loses Rs 5 crore, and the surviving members lose Rs 15 crore, 15% of their Rs 100 crore fund. The order is fixed by the rulebook: initial margin, then the defaulter's default fund contribution, then the clearing corporation's own capital, then the mutual fund. The loss stops 15% into the mutual layer, so survivors will be asked to top their contributions back up.

Picture a housing society with a shared repair fund. If one flat floods the building, the owner's own deposit goes first, then the society's reserve, then a levy on every other flat. Nobody would join a society that levied the neighbours before touching the culprit's deposit. A clearing corporation's default waterfall is that same order written into a rulebook: the defaulter pays first, the house pays next, and the survivors pay last, so that each layer has a reason to keep the one before it adequate. The initial marginCollateral a member posts against the possible loss on its positions over the time it would take to close them out. is sized for a normal close-out; the layers behind it exist for the day the close-out is worse than normal.

Take the layers in order and stop when the loss is covered. The defaulter's Rs 40 crore of initial margin absorbs the first Rs 40 crore, its Rs 10 crore default fund contribution the next Rs 10 crore, so the defaulter has paid Rs 50 crore and Rs 20 crore remains. Chakrata's own Rs 5 crore goes next, leaving Rs 15 crore. The surviving members' Rs 100 crore fund covers that, so Rs 15 crore is drawn from it and Rs 85 crore is untouched. Each survivor loses in proportion to its contribution: a member that funded 8% of the Rs 100 crore loses Rs 1.2 crore.

Three things, and candidates usually name only the first. The survivors are asked to replenish the fund to Rs 100 crore, so their Rs 15 crore loss is realised now and their contribution is restored within days. Second, the rulebook usually caps how much more a survivor can be assessed after a default, often a multiple of its contribution, and in a loss beyond that the clearing corporation moves to recovery tools such as haircutting variation margin gains; confirm the current rulebook before quoting a figure. Third, the risk team reviews why a Rs 40 crore margin was short by Rs 30 crore on a Rs 70 crore close-out: either the margin model's assumed move or its assumed close-out time was too small for this book, and that review is where the real work starts.

State the limit. The waterfall shows who pays on this loss; it does not show whether Rs 5 crore of own capital is enough to make the clearing corporation careful, or whether a default fund of Rs 100 crore would survive two large members failing in the same week, which is the scenario regulators size the fund to. A good close says the mechanics worked here because the loss was 1.75 times the margin, and asks what the fund would have looked like at three times.