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FRM Part I · FRM Exam Part I · Futures Markets

A clearing member's margin account is held on a net basis across all of its clients' positions rather than separately for each client. Which is the main implication for counterparty risk?

Net margining lowers the member's margin requirement because offsetting client positions cancel, but it weakens client protection. Collateral is commingled, so if the clearing member defaults, clients face more risk than under segregated gross margining.

  1. ALower margin requirements for the member, but client positions are less protected if the member defaultsCorrect
  2. BHigher margin requirements, since netting increases exposure
  3. CNo effect, because the clearinghouse ignores client positions
  4. DClients are fully protected because each position is segregated

Explanation

Net margining lets offsetting positions reduce the margin required, lowering cost for the member. However, client assets are commingled, so if the member defaults, clients' positions and collateral are less protected than under gross or segregated margining.

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