They are. That’s what collateral, broker risk management, and (if the broker fails) DTCC is for, to derisk counterparty failure risk.

Someone is paying up.

This is as I understood it. There is a lot of misinformation from folks who believe to understand the entire situation from all players' perspective. I am not able to comprehend the situation well enough. If anyone has seen a good non-biased write up on what has happened so far and what may happen, I would love to see it.

I feel that I learnt something from this twitter thread.

https://twitter.com/KralcTrebor/status/1354952686165225478

That’s a good thread.

Here’s the part that makes no sense to me: why can’t Robinhood use customer funds for their deposit? Imagine a degenerate case: all but one client make no trades at all. One client has $100k deposited and buys $100k worth of GME. Prior to settlement, GME drops by 50%. That client is (effectively) out the entire $100k, and they are owed $50k worth of GME. Robinhood needs to post somewhere between $50k and $100k of collateral to the clearinghouse.

This all seems entirely reasonable with one giant of exception: apparently Robinhood may not draw on the client’s deposit for this. Never mind that, at settlement, the client will be debited the entire $100k. Somehow Robinhood is expected to temporarily come up with an additional $50k-$100k for a two day period. This seems bizarre to me.

Sure the collateral holders pay up. But if they need to get liquidated to service the debt, watch out.

There are two crucial differences. The first one is where the money goes. If they would cover the short, they buy the stocks for a large price on the open market and give the stocks back to the people who loaned them the stock in the first place - so the money goes to people who are currently holding that stock and would be willing to sell at that high price.

On the other hand, if they go bankrupt, then their assets are used to compensate (as much as possible) to everyone they owe in cash - not (as previously expected) in that stock. So the expected huge future purchase of the shorted stocks never happens, and all the WSB people who are holding the stock get to keep it or sell it to each other, as all that compensation money does not flow to the market for GME stocks as it would be if the shorts were actually covered. The brokers would be liable, and they might have insurance that might be liable, but all that liability would be cash-denominated and (as far as I understand - if I'm mistaken, please correct me) would not obligate anyone to buy any GME stocks.

The second big difference is in the timing. The current price is driven by short-term expectations, a hope that somebody is going to (or would be forced to) buy large quantities of that stock soon. If one of the shorting hedge funds goes bankrupt, then any settlement for that will take many months, and that money won't influence the market for that time.

In the case of shorting a stock, the broker is owed shares of the stock by the firm who shorted it. The broker is absolutely still "on the line for it". Its a red line in their books. But in this situation, there's no one going out into the markets to buy a share to repay the broker.

The remaining assets the firm has would be liquidated, those would be used to pay off debts, including those owed to the brokerage. I'm not 100% sure how this works, like, if the estate would purchase as many shares owed as possible, or if they would settle in cash with the brokerage, or what. But, regardless, that wouldn't happen until long after the epicenter of this black swan event.