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FRM Part II · FRM Exam Part II · Derivatives

A bank clears a portfolio of interest rate swaps through a CCP and previously held them bilaterally under a netting agreement with a dealer. It also has another portfolio of swaps with the same dealer that cannot be cleared. Which consequence of moving the first portfolio to the CCP is most likely?

Moving part of a netting set to a CCP fragments netting. Offsets that previously reduced exposure to the dealer are lost, so exposure and collateral needs on the remaining bilateral trades can increase, while the bank also posts margin to the CCP.

  1. ANetting benefits across the two portfolios are lost, so the bank's total exposure and collateral needs on the remaining bilateral trades may riseCorrect
  2. BTotal margin requirements fall to zero because the CCP guarantees performance
  3. CCounterparty exposure is eliminated since the CCP cannot default
  4. DNetting between the two portfolios increases because the CCP aggregates all of the bank's trades

Explanation

Clearing splits one netting set into a cleared set at the CCP and an uncleared set with the dealer. Offsetting positions that previously netted no longer do, so the residual bilateral exposure can increase and margin is posted at both places. The CCP does not remove margin or credit risk and does not net across uncleared trades.

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