FRM Part I · FRM Exam Part I · Central Clearing
A CCP's default fund is structured as a waterfall. Which of the following correctly orders the resources used to cover losses after a clearing member defaults?
The defaulter's own initial margin and default fund contribution are used first, then the CCP's own capital, then the surviving members' default fund contributions. This ordering follows the defaulter-pays principle and aligns CCP incentives before losses are mutualised.
- ADefaulter's initial margin and default fund contribution, then the CCP's own capital contribution, then surviving members' default fund contributionsCorrect
- BSurviving members' default fund contributions, then the defaulter's initial margin, then the CCP's capital
- CThe CCP's own capital, then surviving members' contributions, then the defaulter's initial margin
- DSurviving members' contributions, then the CCP's own capital, then the defaulter's margin
Explanation
The defaulter pays first: its initial margin and its own default fund contribution are consumed. Then the CCP's own capital (skin in the game) is used, followed by mutualised contributions of surviving members. Using survivors' funds first would contradict the defaulter-pays principle.
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