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

A CCP's default waterfall is applied after a clearing member defaults and its initial margin is insufficient. Which ordering of resources is standard?

The standard waterfall uses the defaulter's initial margin first, then its default fund contribution, then the CCP's own dedicated capital, and only afterwards the surviving members' default fund contributions. This makes the defaulter bear losses first and gives the CCP an incentive to manage risk prudently.

  1. ADefaulter's initial margin, defaulter's default fund contribution, CCP's own capital contribution (skin in the game), then surviving members' default fund contributionsCorrect
  2. BSurviving members' default fund contributions, then defaulter's initial margin, then CCP capital
  3. CCCP's own capital first, then surviving members' contributions, then defaulter's margin
  4. DSurviving members' initial margin first, then defaulter's default fund contribution

Explanation

The defaulter pays first: its margin and then its own default fund contribution. The CCP's dedicated capital then absorbs losses, aligning incentives, before the mutualised contributions of surviving members are used. The other orders expose non-defaulters too early.

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