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FRM Part I · FRM Exam Part I · Central Clearing

A CCP's default waterfall has these resources: defaulter's initial margin USD 120 million, defaulter's default fund contribution USD 30 million, CCP's own capital (skin in the game) USD 20 million, and surviving members' default fund contributions USD 400 million. The defaulting member's close-out loss is USD 210 million. Assuming the standard ordering, how much of the loss is absorbed by surviving members' default fund contributions?

Surviving members' default fund contributions absorb USD 40 million. The loss of 210 million is first covered by the defaulter's margin of 120 million, its fund contribution of 30 million, and the CCP's own capital of 20 million, totalling 170 million, leaving 40 million.

  1. AUSD 40 millionCorrect
  2. BUSD 60 million
  3. CUSD 0
  4. DUSD 90 million

Explanation

The order is defaulter's margin (120), defaulter's fund contribution (30), CCP capital (20), then survivors' fund. Cumulative 170, so the remaining 210 - 170 = 40 falls on surviving members. USD 60 omits the CCP capital layer being used before survivors' funds incorrectly, and USD 90 ignores the defaulter's fund contribution.

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