CRXDocs

Liquidation & Default Waterfall

What counts as a default?

Unmet variation margin. When a party owes VM it cannot pay and is globally short across all its agreements, that is an event of default. CRX does not wait for a missed call — it tests solvency on proof, and if the party is insolvent, the cascade runs.

How is a default handled, step by step?

Three stages: assert, prove, resolve.

  1. Assert. The operator, or either counterparty of an agreement, posts a bond from its own general balance and opens a 20-minute proof window. The party under question is frozen for the window.

  2. Prove. Force the variation margin on all of the party's agreements — the caller supplies the complete set, checked against the on-chain count — then test global solvency:

    G ≥ Σ max(0, Vᵢ − Lᵢ)

    where Vᵢ is the unmet VM owed in agreement i, Lᵢ is the haircut value of the party's SCA there, and G is the haircut value of its general balance. All three are valued the same way.

  3. Resolve. Two outcomes:

    • Solvent → the assertion fails. The book is restored and the asserter's bond is forfeited to the accused — you do not get to default someone for nothing.
    • Insolvent → the waterfall runs.

What is the waterfall order?

Each counterparty is made whole from the defaulter's collateral in a fixed order:

  1. The agreement's own SCA first — min(Vᵢ, Lᵢ). Each counterparty takes from the collateral the defaulter posted to that relationship.
  2. The defaulter's general balance, pro-rata — remaining shortfalls are paid from G, split by size against a one-time snapshot, so the order of payment does not change the result.
  3. The guarantee fund — covers any residual. See Seed Fund (~2 min).
  4. A pro-rata haircut — only if the fund itself falls short.

Then every agreement in the set is burned, the party is terminated, and it is stamped with the permanent DEFAULT credit flag.

Why is a counterparty never paid from another's collateral?

Because CRX is not a central counterparty. Each counterparty is paid from the defaulter's own collateral — first the SCA it posted to that relationship, then its general balance. One counterparty's estate is never spent on another's claim. That separation is what keeps CRX a bilateral venue rather than a clearing house.

The cascade burns the whole book before paying out. Burning one agreement to one claimant while the party is insolvent elsewhere would leak a second counterparty's estate to the first. Whole book, then waterfall, then burn.

Does liquidation work when the FX market is closed?

Yes. When a pair's session is closed, the cascade marks against the last trusted rate rather than a missing one, so a default that surfaces overnight still resolves. See Calendar & Sessions (~3 min).

Next: Calendar & Sessions (~3 min) — when each pair is open, and what closing means.