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

A CCP's default waterfall is being reviewed after a clearing member default. Which ordering of loss-absorbing resources is the standard sequence?

The standard waterfall uses the defaulter's initial margin first, then its default fund contribution, then the CCP's own capital, and finally the surviving members' default fund contributions. This ensures the defaulter bears losses first and aligns CCP incentives before losses are mutualised across non-defaulting members.

  1. ASurviving members' default fund contributions, defaulter's initial margin, CCP capital, defaulter's default fund contribution
  2. BCCP capital, surviving members' default fund contributions, defaulter's initial margin, defaulter's default fund contribution
  3. CDefaulter's initial margin, defaulter's default fund contribution, CCP's own capital contribution, surviving members' default fund contributionsCorrect
  4. DDefaulter's default fund contribution, surviving members' contributions, defaulter's initial margin, CCP capital

Explanation

The defaulter pays first: its initial margin and then its own default fund contribution. Next comes the CCP's dedicated own capital (skin in the game), and then the mutualised contributions of surviving members. The other orderings expose non-defaulting parties before the defaulter's resources.

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