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FRM Part II · FRM Exam Part II · Central Clearing

A CCP has a default fund of 1,000 (hypothetical funded exposure resources, all members) and its own capital of 300 is used before mutualised funds. Under the Basel formula for default fund capital, the bank's capital charge for its default fund contribution depends on the hypothetical capital K_CCP. Which statement is correct?

K_CCP is a hypothetical capital requirement the CCP would face on its exposures to all members if it were a bank. Greater prefunded resources reduce net exposure, lowering K_CCP and typically the member's default fund capital charge.

  1. AK_CCP is the capital a bank would need to hold against the CCP's exposures to all clearing members if the CCP were a bank, so it falls when the CCP holds more prefunded resourcesCorrect
  2. BK_CCP is the CCP's actual regulatory equity and is unaffected by member exposures
  3. CK_CCP rises when more default fund resources are prefunded, increasing the member's charge
  4. DK_CCP is zero for any QCCP

Explanation

K_CCP is a hypothetical capital requirement for the CCP's total exposures to members, computed as if it were a bank. More prefunded resources lower the CCP's net exposure, so K_CCP falls and member charges generally fall. It is not actual equity and is not zero.

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