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Full Collateralization

Trading Term

Full collateralization is an arrangement in which the exchange holds cash sufficient to cover the maximum possible payout on every open position. In a binary contract market, each matched YES and NO pair is backed by the full $1.00 that will eventually be paid out, so settlement does not depend on the creditworthiness of the party on the other side. This removes counterparty default risk from the instrument, a property that fully collateralized event contracts share with catastrophe bonds but not with bilateral insurance policies or most over-the-counter derivatives.

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