FRM Part II · FRM Exam Part II · Central Clearing
A CCP's default waterfall is being reviewed. Which ordering of loss absorption after a clearing member default is standard practice?
The defaulter's own resources, initial margin and default fund contribution, are used first. Then the CCP's own capital, then surviving members' default fund contributions and assessments. This follows the defaulter-pays principle and aligns incentives with the CCP's risk management.
- ASurviving members' default fund contributions, then defaulter's initial margin, then CCP's own capital
- BCCP's own capital, then defaulter's initial margin, then defaulter's default fund contribution
- CDefaulter's initial margin and default fund contribution, then CCP's own capital contribution, then surviving members' default fund contributions and further assessmentsCorrect
- DSurviving members' assessments, then CCP's own capital, then defaulter's margin
Explanation
Defaulter-pays principle: the defaulter's margin and default fund contribution are used first, followed by the CCP's dedicated own capital (skin in the game), then mutualised resources of survivors including assessments. The other orderings put survivors or the CCP ahead of the defaulter.
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