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FRM Part II · FRM Exam Part II · Central Clearing

A clearing member (CM) holds a cleared interest rate swap position for a client at a central counterparty (CCP). At the end of the day the swap has lost value to the CM, and the CCP calls for a payment equal to the day's change in mark-to-market value. Which margin component does this call represent?

This is variation margin. Variation margin transfers the daily change in mark-to-market value from the losing party to the gaining party, keeping current exposure close to zero. Initial margin, by contrast, is a buffer against potential future losses over the close-out period.

  1. AVariation margin, which passes realised mark-to-market changes between partiesCorrect
  2. BInitial margin, which covers potential future exposure during the close-out period
  3. CDefault fund contribution, which mutualises losses among members
  4. DExcess collateral, which is posted voluntarily above requirements

Explanation

Variation margin settles the current mark-to-market change, preventing exposure from accumulating. Initial margin is a buffer against future moves during close-out and is not tied to daily value changes. Default fund contributions cover losses beyond defaulter resources.

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