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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

A bank negotiates a CSA with a hedge fund and wants to reduce the exposure it faces if the fund's collateral posting is delayed. Which change to the CSA terms would most directly reduce the bank's exposure?

Introducing an independent amount posted by the hedge fund most directly reduces exposure. It is collateral held upfront regardless of current mark-to-market, so it buffers value changes during the margin period of risk, whereas higher thresholds, weekly calls or larger minimum transfers all leave more exposure uncollateralised.

  1. ARaise the threshold from zero to 20 million
  2. BLengthen the margining period from daily to weekly
  3. CIntroduce a two-way independent amount posted by the hedge fund to the bankCorrect
  4. DIncrease the minimum transfer amount from 0.5 million to 5 million

Explanation

An independent amount is collateral posted upfront, independent of current mark-to-market, giving a buffer against movements during the margin period of risk. Higher thresholds, less frequent calls and larger minimum transfer amounts all increase uncollateralised exposure.

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