I. CORE OBLIGATIONS OF A CCP

1. Novation & Guarantee Obligation:
Once a trade is accepted for clearing, CCP guarantees settlement. If one clearing member defaults, CCP must still pay the non-defaulting member.

LCH Rulebook: "If at any time during the life of the contract, one party defaults, and there is a cost to replace that defaulted counterparty, then the CCP must pay that replacement cost."

2. Risk Management Obligations - EMIR Articles 40-50:

• Margin (Art 41): Collect Initial Margin [IM] and Variation Margin [VM] daily, intraday. IM of non-defaulting members can NEVER be used for another member's default.
• Default Fund (Art 42): Maintain pre-funded mutualized fund. Contributions sized to Cover-2 standard - at least largest 2 members' stress loss.
• Skin-in-the-Game (Art 45): CCP must put its own capital before non-defaulting members' default fund. Typically 25% of its minimum capital.
• Liquidity (Art 44): Maintain qualifying liquid resources to cover default of 2 largest members.
• Collateral & Investment (Art 46-47): Accept only highly liquid collateral with haircuts.

3. Default Waterfall Obligation [Art 45 EMIR]:
Strict order mandated by law:

1. Defaulter's IM + VM
2. Defaulter's Default Fund contribution
3. CCP Skin-in-the-Game Tranche 1
4. Non-defaulting members' Default Fund contributions
5. CCP Skin-in-the-Game Tranche 2 + Further assessment rights / Recovery

4. Client Protection Obligation [Art 39, 48 EMIR]:
CCP must offer:

• Omnibus Client Segregation
• Individual Client Segregation
• Porting: On clearing member default, CCP must commit to trigger transfer of client assets and positions to another clearing member designated by clients, without consent of defaulting member [Art 48(5)].
• Closing out must not expose non-defaulting members to losses they cannot anticipate [Art 48(2)].

5. Transparency & Disclosure: Publish models, stress test results, default management procedures.

II. OBLIGATIONS OF CLEARING MEMBERS TO CCP

• Maintain operating licence, settlement accounts
• Meet margin calls within 1 hour[intraday]
• Contribute to default fund
• Participate in default auction - obligation to bid for defaulter's portfolio
• Compliance with position limits

III. DETAILED CASE LAWS

Case 1: British Eagle International Airlines Ltd v Compagnie Nationale Air France UK House of Lords - The Foundation of CCP Legality

Facts: IATA members had multilateral netting arrangement without CCP. British Eagle went insolvent.
Held: Multilateral netting without novation to a CCP was invalid on insolvency - it violated pari passu rule of set-off of mutual debts.
Ratio: This created legal necessity for CCP structure where contracts are entered with the CCP, not between members. Robustness of this arrangement was later confirmed in Ansett case. This is why all modern CCP laws provide statutory protection to netting.[1975]

Case 2: Lehman Brothers Default at LCH SwapClear (2008) - Successful Default Management

Facts: Lehman was major clearing member at LCH, CME, ICE, SGX. At LCH alone: $9 trillion notional IRS, $2 billion IM held.
CCP Action: LCH declared Lehman in default on 15 Sept 2008, hedged market risk, auctioned portfolio within 3 weeks to other clearing members.
Outcome: Losses were fully within IM held. LCH took $0 loss. Default fund untouched. LCH has managed 9 member defaults (Griffin 1998, Lehman 2008, VTB 2022) - in all cases losses were within initial margin held.
Lesson: Validates defaulter-pays principle and adequate IM sizing. Cited in CPMI-IOSCO as best practice.

Case 3: Nasdaq Clearing AB vs Einar Aas (2018) - Failure of Margin Model

Facts: Norwegian power trader Einar Aas had massive concentrated spread position on German-Nordic power. Position $ 2.2bn. Margin called but insufficient. Defaulted, loss €114 million.
Waterfall Hit: Defaulter's collateral €7m exhausted → Nasdaq's skin-in-game €7m → Non-defaulters' default fund €107m mutualized among members like Citi, Goldman, Morgan Stanley.
Litigation: Members sued Nasdaq for breach of Art 41 - inadequate margin model, concentration add-on not applied. Court examined if CCP breached obligation to ensure closing out does not expose non-defaulting members to losses they cannot anticipate [Art 48(2) EMIR] and obligation to limit exposures [Art 43(3)].
Outcome: Swedish FSA investigation led to €36m fine to Nasdaq Clearing, new EMIR rules on concentration risk. Led to reform of default fund sizing.
Legal Point: CCP's obligation is not absolute guarantee - but it has duty of care in risk model validation.

Case 4: HanMag Securities / KRX CCP Crisis (2013) South Korea

Trader at HanMag entered erroneous orders causing KRW 46bn loss exceeding firm's capital. KRX, as CCP, had to declare HanMag default and use its own capital. Members refused to cover loss initially.
Held: Under Korean Capital Markets Act Art 77-78, CCP guarantee is irrevocable once novated. KRX had to absorb and then recover from members. Established that CCP cannot reject novated trade even if clearly erroneous.

Case 5: India - SEBI Framework for NSE Clearing Ltd, ICCL, MCCIL

While no full default yet, SEBI Circular SEBI/HO/MRD2_DCAP/CIR/2021/135 imposes obligations:

• Core Settlement Guarantee Fund [CSGF] minimum 50% from CCP, 25% from Stock Exchange, 25% from members.
• Interoperability: If one CCP defaults, others must handle. In BSE vs SEBI SAT Appeal 2019, SAT upheld SEBI's right to mandate interoperability as client protection under Art 48 equivalent.

Tax Treatment Case relevant to India: Same principle as CRR/SLR case - interest/compensation paid by CCP for settlement failure is compensatory, not penal - allowable under Section 37(1).

IV. When CCP Itself Defaults - SIX x-clear / Art 59 FMIA

EMIR equivalent Article 42,45,48 - Default provisions provide rules for GCM default, co-CCP default, or CCP's own default. If CCP fails, its waterfall is exhausted and recovery/resolution under EU CCP Recovery & Resolution Regulation 2021 triggers - variation margin haircutting, partial tear-up.