FRM Part II · FRM Exam Part II · Derivatives

A bank clears a portfolio of interest rate swaps through a central counterparty (CCP). The CCP requires the bank to post a collateral amount at trade inception that is designed to cover potential losses on the portfolio if the bank defaults and the position must be closed out over several days. Which term best describes this collateral?

The collateral is initial margin. A CCP collects it upfront to cover potential losses during the close-out period if a clearing member defaults. Variation margin only transfers daily mark-to-market gains and losses, and the default fund is a separate mutualized resource.

AVariation margin
BInitial marginCorrect
CDefault fund contribution
DRebate margin

Explanation

Initial margin is posted at inception to cover potential future close-out losses over a margin period of risk. Variation margin, by contrast, settles daily mark-to-market changes. Default fund contributions are mutualized resources used after a defaulter's margin is exhausted.

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