FRM Part II · FRM Exam Part II · Central Clearing
A bank clears interest rate swaps through a qualifying central counterparty (QCCP) under Basel III. Which statement best describes the regulatory capital treatment of the bank's trade exposures to that QCCP?
Under Basel III, a bank's trade exposures to a qualifying central counterparty receive a 2% risk weight, far lower than many bilateral exposures. Default fund contributions are capitalised separately, so a blanket zero or 100% weight is wrong.
- AA risk weight of 2% applies to trade exposures to the QCCP, compared with the much higher weights applied to bilateral non-cleared exposures to many corporatesCorrect
- BA 0% risk weight applies to all exposures to the QCCP, including default fund contributions
- CA 100% risk weight applies to trade exposures because CCPs are unrated entities
- DTrade exposures are exempt from CVA capital but attract the full bilateral SA-CCR add-on
Explanation
Basel III assigns a 2% risk weight to clearing member trade exposures to a QCCP (4% under certain conditions where client-clearing arrangements do not meet requirements). Default fund contributions are treated separately and are not zero-weighted. The 0% and 100% options misstate the standard.
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