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FRM Part II · FRM Exam Part II · Central Clearing

A clearing member's risk manager notes that the CCP's default fund is sized under a 'Cover 2' standard. Which statement best describes what this means?

Cover 2 means the CCP's pre-funded resources, including margin and the default fund, must withstand the default of the two members with the largest exposures under extreme but plausible market conditions. It is a stress-based sizing standard, not a multiple of margin.

  1. AThe fund should cover losses from the default of the two clearing members with the largest exposures in extreme but plausible conditions, in addition to their marginCorrect
  2. BThe fund should cover the default of any two members only in normal market conditions, without regard to margin
  3. CThe fund must equal twice the largest member's initial margin
  4. DThe fund must be funded by at least two independent sources, including the CCP's own capital

Explanation

Cover 2 requires resources to withstand the default of the two participants (with affiliates) causing the largest aggregate credit exposure under extreme but plausible market conditions. It is a stress-based sizing standard, not a fixed multiple of margin or a funding-source rule.

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