FRM Part II · FRM Exam Part II · Central Clearing
A CCP's default waterfall is being reviewed after a clearing member defaults. Which ordering of loss absorption is the standard sequence used by CCPs?
The standard order is the defaulter's initial margin, then its default fund contribution, then the CCP's own skin-in-the-game capital, then surviving members' default fund contributions, and finally assessments or recovery tools. The defaulter pays first before losses are mutualised.
- ADefaulter's initial margin, defaulter's default fund contribution, CCP's own capital contribution (skin in the game), surviving members' default fund contributions, then further assessments or recovery toolsCorrect
- BSurviving members' default fund contributions, defaulter's initial margin, CCP's own capital, then defaulter's default fund contribution
- CCCP's own capital, surviving members' default fund contributions, defaulter's initial margin, then defaulter's default fund contribution
- DDefaulter's default fund contribution, surviving members' contributions, defaulter's initial margin, then CCP's own capital
Explanation
Defaulter pays first (margin, then its default fund share), followed by the CCP's own dedicated capital, then mutualised contributions of survivors, then assessments or recovery. The other orders put non-defaulters ahead of the defaulter or the CCP's capital too early.
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