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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A CCP with a cover-2 standard has three clearing members. Stress-test losses beyond initial margin, by member, are: A 400 million, B 300 million, C 100 million. The CCP holds a default fund of 650 million and dedicated own capital of 50 million. Under the cover-2 standard, what is the minimum prefunded financial resource needed beyond initial margin, and is the CCP compliant if the default fund plus own capital is counted?

Cover-2 requires covering the two largest member losses beyond initial margin, which is 400 plus 300, or 700 million. The default fund of 650 million plus own capital of 50 million also equals 700 million, so the CCP just meets the standard.

  1. ARequired 700 million; compliant, since 700 million is availableCorrect
  2. BRequired 700 million; not compliant, since only 650 million is available
  3. CRequired 500 million; compliant
  4. DRequired 800 million; not compliant

Explanation

Cover-2 requires resources to withstand the default of the two members with the largest exposures: 400 + 300 = 700 million. Available resources are 650 + 50 = 700 million, so the requirement is exactly met. Counting only the default fund (650) would wrongly show a shortfall.

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