Skip to content

FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

A CCP has three clearing members. Member X defaults with a close-out loss of USD 300 million. X's initial margin is USD 180 million and its default fund contribution is USD 40 million. The CCP's own capital tranche (skin in the game) is USD 20 million. Surviving members Y and Z have default fund contributions of USD 60 million and USD 100 million, and losses on the remaining mutualized fund are allocated pro rata to their contributions. Using the waterfall order defaulter's margin, defaulter's fund, CCP capital, then surviving members' fund, how much loss does member Z bear?

Z bears USD 37.5 million. The loss of 300 is reduced by X's margin of 180, X's default fund of 40 and CCP capital of 20, leaving 60. That is shared between Y and Z in proportion 60 to 100, so Z bears 60 times 100 over 160.

  1. AUSD 31.25 millionCorrect
  2. BUSD 37.50 million
  3. CUSD 50.00 million
  4. DUSD 62.50 million

Explanation

Loss 300 less margin 180 leaves 120. Less X's fund 40 leaves 80. Less CCP capital 20 leaves 60. The remaining 60 is mutualized across Y and Z in proportion 60:100, so Z bears 60 x 100/160 = 37.5. Check: Y bears 22.5, total 60. So Z bears 37.5, which is option B, not A.

Did you get it right without looking?

One question tells you little. A timed set on Exchanges and OTC Markets shows your real accuracy, how long you take and where you lose marks.

Practise Exchanges and OTC MarketsFree diagnostic mock

More Exchanges and OTC Markets questions