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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A bank and a hedge fund trade under a CSA that requires daily exchange of variation margin with zero threshold and zero minimum transfer amount. The portfolio's mark-to-market value to the bank rises from USD 4.0 million to USD 6.5 million overnight, and the bank currently holds USD 4.0 million of collateral from the fund. Which action does the CSA require?

The fund must post an additional USD 2.5 million. With no threshold or minimum transfer amount, collateral must match the bank's exposure of USD 6.5 million, and the bank already holds USD 4.0 million, leaving a USD 2.5 million shortfall to be delivered.

  1. AThe fund posts an additional USD 2.5 million to the bankCorrect
  2. BThe bank posts USD 2.5 million to the fund
  3. CThe fund posts USD 6.5 million to the bank in addition to the existing collateral
  4. DNo transfer occurs because the change is below the next monthly margin call

Explanation

With zero threshold and zero minimum transfer amount, collateral held must equal the bank's exposure of USD 6.5 million. The bank holds USD 4.0 million, so the shortfall of USD 2.5 million must be posted by the fund. Posting the full USD 6.5 million would double count the collateral already held.

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