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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

A clearing member has a cleared portfolio with a CCP. Yesterday's variation margin account was settled. Today the portfolio's mark-to-market value falls by USD 4.2 million, and the initial margin requirement is unchanged at USD 10 million. Which statement best describes the required flows?

The member pays USD 4.2 million in variation margin to cover the day's mark-to-market loss, while the USD 10 million initial margin stays in place as a separate buffer against potential future losses. Initial margin is not used for ordinary daily settlement.

  1. AThe member pays USD 4.2 million of variation margin to the CCP, and the initial margin stays at USD 10 millionCorrect
  2. BThe member pays USD 14.2 million to the CCP because variation margin is added to initial margin
  3. CThe member receives USD 4.2 million from the CCP because the CCP absorbs the loss
  4. DThe member pays nothing because the loss is covered by the initial margin

Explanation

Variation margin settles daily mark-to-market changes, so the member pays USD 4.2 million. Initial margin is a separate buffer for potential future exposure and remains USD 10 million. It is not drawn down for ordinary daily losses, and it is not topped up by the loss amount.

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