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

A CCP has two members, A and B, each with a bilateral-equivalent portfolio. Member A has a net exposure of +USD 8 million to B, and trades with other members are zero. The CCP's default waterfall includes, in order, the defaulter's initial margin, the defaulter's default fund contribution, the CCP's own capital contribution, and then surviving members' default fund contributions. Member B defaults with a loss to the CCP of USD 30 million after closing out. B posted initial margin of USD 14 million and a default fund contribution of USD 6 million. The CCP's own capital tranche is USD 4 million. How much of the loss falls on surviving members' default fund contributions?

The loss of USD 30 million is absorbed first by the defaulter's margin of 14, then its default fund contribution of 6, then CCP capital of 4. That leaves USD 6 million to be covered by surviving members' default fund contributions.

  1. AUSD 6 millionCorrect
  2. BUSD 10 million
  3. CUSD 16 million
  4. DUSD 0

Explanation

Apply the waterfall: defaulter's margin covers 14, leaving 16; defaulter's default fund contribution covers 6, leaving 10; CCP capital covers 4, leaving 6. The remaining USD 6 million falls on surviving members' default fund contributions. The 10 million option omits the CCP's own capital tranche.

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