FRM Part II · FRM Exam Part II · Central Clearing
A CCP's member X defaults. Losses after closing out X's portfolio are 500 million. X's initial margin is 220 million and its default fund contribution is 40 million. The CCP's skin in the game is 30 million. Surviving members' default fund contributions total 400 million. How much of the loss falls on surviving members' default fund contributions (ignore variation margin and assessments)?
Survivors' default fund contributions absorb 210 million. The 500 million loss is reduced by 220 million of initial margin, 40 million of the defaulter's fund contribution and 30 million of CCP skin in the game, leaving 210 million to be mutualized.
- A210 millionCorrect
- B240 million
- C170 million
- D250 million
Explanation
Loss 500 less defaulter margin 220 leaves 280. The defaulter's fund contribution of 40 leaves 240. The CCP's skin in the game of 30 leaves 210, which is charged to survivors' contributions. Option 240 omits the CCP's tranche; 170 wrongly subtracts the CCP tranche twice (or treats it as 70).
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