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FRM Part II · FRM Exam Part II · Future Value and Exposure

A bank considers moving a derivatives portfolio with a counterparty from a one-way CSA, where only the bank posts collateral, to a two-way CSA, where both parties post variation margin. What is the most likely effect on the bank's counterparty credit exposure to that counterparty?

The bank's exposure to the counterparty most likely falls. Under a two-way CSA the bank receives variation margin whenever the portfolio is in its favour, whereas under a one-way CSA it received none. Collateral it posts reduces the counterparty's exposure, not its own.

  1. AExposure falls because the bank now receives collateral when the portfolio is in its favour.Correct
  2. BExposure rises because the bank must post additional collateral.
  3. CExposure is unchanged because collateral affects only funding costs.
  4. DExposure rises because two-way CSAs remove close-out netting.

Explanation

Under a one-way CSA the bank receives no collateral, so its positive exposure is uncollateralised. A two-way CSA lets it receive collateral when in the money, reducing exposure. Posting collateral affects the counterparty's exposure to the bank, not the bank's own, and CSAs do not remove netting.

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