FRM Part I · FRM Exam Part I · Central Clearing
A CCP's margin model is pro-cyclical: initial margin rises sharply when volatility increases. A dealer holds a cleared portfolio whose initial margin is based on a 99% loss estimate proportional to volatility. Volatility doubles from 1.5% to 3.0% daily during a crisis, and the margin was 12 million before. Holding positions constant, what additional margin must the dealer post, and what is the key regulatory concern?
The dealer must post an additional 12 million, since margin doubles from 12 to 24 million with volatility. The regulatory concern is pro-cyclicality: margin calls peak in stress, draining liquidity and potentially forcing asset sales that amplify market turmoil.
- A12 million; the concern is that margin calls amplify liquidity stress and force asset salesCorrect
- B6 million; the concern is that margin falls when volatility rises
- C12 million; the concern is that margin is never collateralized
- D24 million; the concern is that CCPs ignore volatility
Explanation
Margin proportional to volatility doubles from 12 to 24 million, an additional 12 million. Pro-cyclicality means calls peak in stress, draining liquidity and forcing asset sales that deepen the stress. The 24 million option confuses total with incremental margin.
Did you get it right without looking?
One question tells you little. A timed set on Central Clearing shows your real accuracy, how long you take and where you lose marks.
More Central Clearing questions
- Which statement best describes a key risk concentration created by moving OTC derivatives into central clearing?
- Bank A and Bank B have three OTC derivatives under a single legally enforceable bilateral netting agreement. Mark-to-market values to Bank A…
- In a central counterparty (CCP) clearing structure, what is the primary purpose of the initial margin collected from a clearing member?
- Which statement about regulatory reforms for non-centrally cleared OTC derivatives following the 2007-2009 crisis is most accurate?
- Which feature of a CCP's default waterfall correctly describes the usual order in which losses from a defaulting clearing member are absorbe…
- Following the global financial crisis, non-centrally cleared OTC derivatives became subject to which reform intended to encourage clearing a…