The sequence of use of the settlement resources in case of a default (default waterfall) is as follows
< Sequence of Use of Settlement Resources >
  1. Assets of the Default Member
    Securities Market
    The assets of the default member including the settlement funds and securities that the default member is supposed to receive, and the default member’s contribution to the Joint Compensation Fund(hereinafter "JCF") are used in the foremost order in advance of any others
    Derivatives Market
    The margin of the default member is first used, followed by the assets of the default member such as the settlement funds and underlying assets. Then, the default member’s contribution to the JCF and the Fidelity Guarantee Money are used.
  2. KRX Settlement Reserve ( Junior tranche)
    Settlement reserve of KRX
    KRX holds some of its retained earnings as ‘settlement reserve’, based on the risk exposure of each market calculated by stress test. In case where the assets and the JCF contributed by the default member are not enough to compensate for the loss, the KRX uses a part of its settlement reserve to compensate for the remaining damage (so-called Skin-in-the-game scheme).
  3. Joint Compensation Fund of Non-default Members’
    JCF of Non-default members
    • In case where the damages cannot be fully compensated using the assets of the default member and 1st part of KRX’s settlement reserve, the non-default members’ contribution to the JCF is used to cover the remaining loss. The contribution by non-default members here is used in proportion to each member’s contribution.
    • The JCF is reserved separately for the securities and the derivatives markets, and also used separately for each market. The amount of the JCF to be reserved is determined by the risk level of each market. (Articles of Incorporation §54, Membership Regulation §23)
  4. KRX Settlement Reserve ( Senior tranche)
    Settlement reserve of KRX
    In case where the non-default members’ contributions to the JCF is used up, but still the damage is not fully compensated, the KRX uses the remaining of its settlement reserve.
  5. Additional Joint Compensation Fund(Cash call by CCP)
    Additional Joint Compensation Fund
    International standards recommend CCPs to have recovery tools protecting them from direct falling into financial instability and the most widely adopted tool is 'cash call'. When the default loss exceeds pre-funded safeguards (pre-funded 'Basic JCF' and KRX's Settlement Reserve), KRX may require surviving clearing members for additional contributions and the members shall post their contributions within 2 business days. Additional JCF contribution is capped at 100% of each clearing member's Basic JCF contribution.
  6. Assets of the Exchange
    Assets of the Exchange
    When the KRX settlement reserve is exhausted, then KRX’s credit lines and other assets are used
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