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FRM Part II · FRM Exam Part II · Central Clearing

A clearing member has two offsetting positions in the same product class with a CCP: a long position with mark-to-market value of +40 million and a short position with mark-to-market value of -35 million (from the member's perspective), both in the same netting set. Because of novation to the CCP, what is the member's net exposure to the CCP before collateral, and what is the key reason it is reduced?

The net exposure is 5 million (40 minus 35). Once trades are novated to the CCP they fall into a single netting set, so gains on one position offset losses on the other, reducing exposure to the net value rather than the gross 40 million.

  1. AGross exposure of 40 million, because the CCP cannot net positions across trades
  2. BNet exposure of 5 million, because multilateral netting at the CCP offsets positions across the netting setCorrect
  3. CNet exposure of 75 million, because both positions are added to reflect CCP risk
  4. DZero exposure, because the CCP always holds enough variation margin to cover any value

Explanation

With novation both trades sit with the CCP in one netting set, so values offset: 40 - 35 = 5 million. Gross 40 ignores netting. Adding absolute values (75) is wrong since offsets reduce exposure. Zero exposure ignores that the net value is positive before margin.

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