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

A CCP has the following default waterfall for a defaulting clearing member: defaulter's initial margin, then defaulter's default fund contribution, then CCP's own capital (skin in the game), then surviving members' default fund contributions. A member defaults with losses of USD 500 million after close-out. Defaulter's initial margin is USD 300 million, its default fund contribution is USD 50 million, and CCP skin in the game is USD 20 million. How much loss is allocated to the surviving members' default fund contributions?

Surviving members bear USD 130 million. The USD 500 million loss is first absorbed by the defaulter's USD 300 million margin, then its USD 50 million fund contribution, then USD 20 million of CCP capital, leaving USD 130 million for the mutualized default fund.

  1. AUSD 130 millionCorrect
  2. BUSD 150 million
  3. CUSD 180 million
  4. DUSD 200 million

Explanation

Losses of 500 less defaulter's margin 300 leaves 200. Less defaulter's fund contribution 50 leaves 150. Less CCP capital 20 leaves 130 for survivors. Check: 300+50+20+130 = 500. USD 150 million ignores the CCP's capital layer.

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