FRM Part II · FRM Exam Part II · Central Clearing
A CCP has three surviving members with default fund contributions of USD 100 million, USD 60 million and USD 40 million. After the defaulter's resources and CCP capital are used, a residual loss of USD 80 million is mutualized pro rata to default fund contributions. The CCP rules also allow assessments up to 100% of each member's contribution after the fund is depleted. The member with USD 60 million contribution is charged for its share. What is its loss from the fund, and what is the key incentive concern for members?
The member bears USD 24 million, being 30% of the USD 80 million loss, since its USD 60 million is 30% of the USD 200 million fund. The key concern is moral hazard: loss sharing weakens members' incentive to monitor and control the risk-taking of others.
- AUSD 24 million; members may lack incentive to monitor the CCP's risk management since losses are sharedCorrect
- BUSD 40 million; members face no incentive problem because losses are capped
- CUSD 24 million; the concern is that margins are procyclical
- DUSD 16 million; members bear loss in proportion to trading volume
Explanation
Total fund = 200; the 60 member's share is 30%, so 0.3 x 80 = 24. Mutualization creates a moral hazard: members bear losses from others' positions and may not monitor risk-taking, so governance and risk-based contributions matter. Other options use wrong numbers or unrelated concerns.
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