Skip to content

FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A bank argues that mandatory central clearing of standardized derivatives eliminates counterparty risk from its derivatives book. Which response best identifies a flaw in this argument?

Central clearing does not eliminate counterparty risk; it concentrates it in the CCP. Members still face default fund contributions, loss-allocation, and procyclical margin calls that strain liquidity. Claims that CCPs take no margin, prohibit netting or exclude swaps are false, since CCPs rely on margin and multilateral netting.

  1. ARisk is concentrated in the CCP, which may itself fail, and clearing members still face exposure through default fund contributions, margin calls and liquidity demandsCorrect
  2. BClearing increases bilateral exposures because netting is prohibited
  3. CCCPs do not require margin, so exposure remains unsecured
  4. DClearing applies only to exchange-traded futures, so it has no effect on swaps

Explanation

Central clearing replaces bilateral exposures with exposure to a CCP, using multilateral netting and margin. This reduces but does not eliminate risk: CCPs concentrate risk, members may be called on to contribute to default funds, and procyclical margin calls create liquidity strain. The other options are false, since CCPs require margin and net positions, and swaps are cleared.

Did you get it right without looking?

One question tells you little. A timed set on Solvency, Liquidity and Other Regulation After the Global Financial Crisis shows your real accuracy, how long you take and where you lose marks.

Practise Solvency, Liquidity and Other Regulation After the Global Financial CrisisFree diagnostic mock

More Solvency, Liquidity and Other Regulation After the Global Financial Crisis questions