FRM Part I · FRM Exam Part I · Central Clearing
A CCP has two clearing members. Member X is long 300 futures contracts and Member Y is short 300 contracts of the same series. Open interest in this series is otherwise zero. After novation, what is the CCP's net position and what is its principal market-risk profile on this series?
The CCP is flat: it is short 300 contracts to Member X and long 300 to Member Y, so its net market exposure is zero. Its remaining risk is that either member defaults, leaving an unmatched position that must be hedged or replaced.
- ALong 300 contracts, exposed to price declines
- BShort 300 contracts, exposed to price increases
- CFlat (long 300 and short 300), with no net market risk but exposure to default of X or YCorrect
- DLong 600 contracts, exposed to price declines
Explanation
After novation the CCP is short 300 to X and long 300 to Y, so its net position is zero and it has no net price exposure. Its risk is that one member defaults, leaving it with an unhedged position that it must close out or replace. Long 600 double counts the position.
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