FRM Part I · FRM Exam Part I · Central Clearing
A CCP's default waterfall is being reviewed after a clearing member defaults. Which ordering of loss absorption is standard, from first loss to last loss?
The standard order is the defaulter's own resources first (initial margin and default fund contribution), then the CCP's own capital, and finally the surviving members' default fund contributions. Defaulters pay first so that non-defaulting members are only exposed to mutualized losses once the defaulter's resources and CCP capital are exhausted.
- ASurviving members' default fund contributions, defaulter's initial margin, CCP capital, defaulter's default fund contribution
- BDefaulter's initial margin and default fund contribution, CCP's own capital contribution, surviving members' default fund contributionsCorrect
- CCCP's own capital, surviving members' default fund contributions, defaulter's initial margin
- DDefaulter's default fund contribution, surviving members' contributions, defaulter's initial margin, CCP capital
Explanation
The standard waterfall uses the defaulter's resources first (initial margin, variation margin and its default fund contribution), then a tranche of CCP capital (skin in the game), then the mutualized contributions of surviving members. The other orders expose non-defaulting members before the defaulter's own resources are used up.
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