FRM Part II · FRM Exam Part II · Central Clearing
A CCP's clearing members trade in a market where a large member defaults. The CCP's default waterfall is applied in order. Which sequence of resources is most consistent with standard CCP practice for covering losses beyond the defaulter's initial margin?
After the defaulter's initial margin, losses are absorbed by the defaulter's default fund contribution, then the CCP's own capital (skin in the game), and only then by the mutualised default fund contributions of surviving members. The defaulter pays first so survivors are protected.
- ASurviving members' default fund contributions, then the defaulter's default fund contribution, then CCP capital
- BDefaulter's default fund contribution, then the CCP's own capital contribution (skin in the game), then surviving members' default fund contributionsCorrect
- CCCP's own capital, then surviving members' initial margin, then the defaulter's default fund contribution
- DSurviving members' variation margin, then the CCP's capital, then the defaulter's default fund contribution
Explanation
Standard waterfall: defaulter's initial margin, then defaulter's default fund contribution, then a tranche of CCP capital, then the mutualised default fund of survivors, then further assessments or recovery tools. The defaulter's own resources are used first, which makes option 2 correct. Others use survivors' funds or margin before the defaulter's.
Did you get it right without looking?
One question tells you little. A timed set on Central Clearing shows your real accuracy, how long you take and where you lose marks.
More Central Clearing questions
- A bank clears interest rate swaps through a qualifying central counterparty (QCCP) as a clearing member. Under the Basel framework, which st…
- A risk manager argues that moving a bank's OTC derivatives to a CCP eliminates counterparty credit risk. Which response is most accurate?
- A regulator requires a CCP to hold resources so that it can withstand the default of the two clearing members and their affiliates generatin…
- A clearing member has two offsetting positions in the same product class with a CCP: a long position with mark-to-market value of +40 millio…
- A bank trades interest rate swaps with ten dealers bilaterally. It then moves all trades to a single central counterparty (CCP) that clears …
- A CCP's member X defaults. Losses after closing out X's portfolio are 500 million. X's initial margin is 220 million and its default fund co…