As I understand it a trade works as follows. A buys from B on an exchange. Instead of a direct exchange, A and B report the trade to their clearing brokers. The clearing brokers then submit the trades to a clearing house and if they match then the clearing house processes the trade. In case that A or B default, the clearing house guarantees the trade.
I have also heard, however, that both the exchange and clearing brokers also guarantee the trade. How is the risk shared? More specifically:
- Is the exchange's role in guaranteeing trades just to require participants to have a clearing broker? If so, what's the point of exchange margin requirements if the clearing broker guarantees the trades?
- My guess is that the clearing house losses are split among the constituent clearing brokers so they all share the risk together. Is this true?
- How is the risk distributed across clearing brokers in a clearing house? Do they have to put in more collaterals / pay more fees if they bring in bad trades?