In this paper, we answer three questions about the appropriate allocation of nondefault losses at central counterparties (CCPs).

• Who should assume financial responsibility for a nondefault loss?
• What portion of a nondefault loss should each party pay?
• How should CCPs and clearing members address catastrophic nondefault losses?

In answer to the first question, we argue that financial responsibility should be shared among the parties whose decisions contributed to the loss. Determining whose decisions contributed to a loss requires an understanding of the type of loss involved. In answer to the second question, we argue that CCPs and clearing members should establish loss-sharing formulas that take into account the ownership structure and particular needs of each CCP and its clearing members. The third question concerns what we term “catastrophic losses”: losses so large that those responsible for absorbing them cannot do so. To address catastrophic losses, we argue that CCPs and clearing members should consider not the cause of the loss, but whether the value of continuing CCP operations justifies covering it.