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FRM Part II · FRM Exam Part II · Derivatives

A bank's trade exposures to a qualifying central counterparty (QCCP) include client-cleared and house trades. Under the Basel framework, which statement about capital for these exposures is correct?

Under Basel rules, trade exposures to a qualifying central counterparty carry a 2% risk weight, while the bank's default fund contributions are capitalised separately using a dedicated formula. Neither is exempt, and the 100% or deduction treatments apply to non-qualifying CCPs or other cases.

  1. ATrade exposures to a QCCP receive a 2% risk weight, and default fund contributions are capitalised separatelyCorrect
  2. BTrade exposures to a QCCP receive a 100% risk weight, with default fund contributions excluded from capital
  3. CTrade exposures to a QCCP are exempt from capital, and default fund contributions receive a 2% risk weight
  4. DTrade exposures to a QCCP receive a 20% risk weight, and default fund contributions are deducted from CET1

Explanation

Basel assigns a 2% risk weight to trade exposures (including initial margin posted when not bankruptcy remote is treated under the same framework with conditions) to QCCPs. Default fund contributions are capitalised separately using a formula based on the CCP's hypothetical capital and the bank's share. They are neither excluded nor deducted wholesale.

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