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FRM Part I · FRM Exam Part I · Central Clearing

A clearing member defaults. The CCP holds the member's initial margin of 90 million and default fund contribution of 30 million. Closing out the portfolio produces a loss of 200 million. The CCP's skin-in-the-game is 25 million, and surviving members' default fund contributions total 400 million. Assuming the standard waterfall (defaulter's margin, defaulter's fund contribution, CCP skin-in-the-game, then surviving members' fund), how much of the loss falls on surviving members' default fund contributions?

Surviving members bear 55 million. The 200 million loss is absorbed first by the defaulter's 90 million margin and 30 million fund contribution, leaving 80 million, then by the CCP's 25 million skin-in-the-game, leaving 55 million for the mutualized default fund.

  1. A55 millionCorrect
  2. B80 million
  3. C110 million
  4. D30 million

Explanation

Defaulter's margin covers 90, leaving 110. Defaulter's fund contribution covers 30, leaving 80. CCP skin-in-the-game covers 25, leaving 55 for the surviving members' fund. 80 skips the CCP layer; 110 ignores the defaulter's fund contribution; 30 is just the defaulter's contribution.

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