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FRM Part II · FRM Exam Part II · Central Clearing

A clearing member of a central counterparty (CCP) holds a cleared interest rate swap position that has gained value over the day. Which description best captures the purpose and direction of the variation margin (VM) flow in this situation?

The CCP pays variation margin to the clearing member whose position gained value. VM passes daily mark-to-market changes between the parties, which resets current exposure to about zero. Covering potential future moves over the margin period of risk is the job of initial margin, not variation margin.

  1. AThe CCP pays VM to the clearing member to reflect the mark-to-market gain, which keeps the CCP's current exposure close to zeroCorrect
  2. BThe clearing member posts additional VM to the CCP to cover potential future price moves over the margin period of risk
  3. CThe clearing member receives VM only at the end of the swap's life, when the gain is realized
  4. DThe CCP retains the VM as a contribution to the default fund, which is mutualized among members

Explanation

Variation margin settles daily mark-to-market changes. A member whose position gained value receives VM from the CCP, so the exposure between the parties is reset to roughly zero. Covering potential future moves is the function of initial margin, not VM.

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