FRM Part II · FRM Exam Part II · Central Clearing
A central counterparty (CCP) experiences the default of a clearing member. Under the typical default waterfall, which resource is normally used first to cover the loss after the defaulter's initial margin is exhausted?
After the defaulter's margin is used, the defaulter's own default fund contribution is consumed next. Only afterwards do the CCP's own capital and the surviving members' mutualized contributions absorb losses, because the defaulter should bear its own losses first.
- AThe defaulter's default fund contributionCorrect
- BThe non-defaulting members' default fund contributions
- CA call for additional assessments from surviving members
- DThe CCP's equity beyond its skin-in-the-game tranche
Explanation
The usual order is the defaulter's initial margin and variation margin, then the defaulter's own default fund contribution, then the CCP's own capital (skin in the game), and only then the mutualized contributions of surviving members. Using survivors' funds before the defaulter's own would break the defaulter-pays principle.
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