FRM Part I · FRM Exam Part I · Central Clearing
A CCP's default waterfall after a clearing member defaults is applied in a typical order. Which sequence is correct?
The usual waterfall uses the defaulter's margin first, then its default fund contribution, then the CCP's own capital, and finally the surviving members' default fund contributions. Defaulter-pays resources are exhausted before losses are mutualized among non-defaulting members.
- ASurviving members' default fund contributions, defaulter's margin, CCP capital, defaulter's default fund contribution
- BCCP capital, surviving members' default fund contributions, defaulter's margin, defaulter's default fund contribution
- CDefaulter's margin, defaulter's default fund contribution, CCP's own capital contribution, surviving members' default fund contributionsCorrect
- DDefaulter's default fund contribution, surviving members' contributions, defaulter's margin, CCP capital
Explanation
The defaulter pays first: its initial and variation margin, then its default fund contribution. Next comes a tranche of the CCP's own capital (skin in the game), and only then the mutualized contributions of surviving members. Other orders expose non-defaulters before the defaulter's resources are exhausted.
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