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FRM Part II · FRM Exam Part II · Derivatives

A CCP's default waterfall is being reviewed. A member defaults and its losses exceed its initial margin. Under a typical waterfall, which resource is used next?

After the defaulter's initial margin is exhausted, the next resource is the defaulter's own default fund contribution. Only later does the waterfall use the CCP's dedicated capital and then the mutualised contributions of surviving members, so defaulter-pays resources come before mutualised ones.

  1. AThe defaulter's default fund contributionCorrect
  2. BNon-defaulting members' default fund contributions
  3. CThe CCP's capital beyond its skin-in-the-game
  4. DAssessment powers on surviving members

Explanation

The usual order is defaulter's initial margin, then defaulter's default fund contribution, then the CCP's own dedicated capital (skin in the game), then surviving members' default fund contributions, then further assessments. Mutualised resources are used only after the defaulter's own resources are exhausted.

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