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FRM Part II · FRM Exam Part II · Central Clearing

A clearing member observes that its CCP raises initial margin sharply during a volatile week. Which statement best describes the risk management trade-off?

Raising initial margin in volatile markets better protects the CCP against member default, but it forces members to find extra liquid collateral quickly. This procyclical liquidity drain can amplify market stress, so the benefit comes with a funding risk for members.

  1. AHigher margin reduces the CCP's exposure to member default but increases members' liquidity demands and can amplify stressCorrect
  2. BHigher margin removes all liquidity risk for clearing members
  3. CHigher margin increases CCP credit exposure to members
  4. DMargin changes have no effect on member funding needs because margin is non-cash

Explanation

Increasing initial margin protects the CCP against potential future exposure, but members must source additional liquid collateral quickly, which is procyclical and can amplify market stress. It does not remove liquidity risk and does not raise the CCP's exposure.

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