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FRM Part I · FRM Exam Part I · Futures Markets

A clearinghouse has three members, each with a 1,000 variation-margin-covered position. Member A defaults after a sharp market move, and its initial margin of 40 million covers only part of the loss of 100 million. The clearinghouse's own capital contribution is 10 million, and the default fund contributions of surviving members total 90 million. Using the standard default waterfall (defaulter's margin, then defaulter's default fund contribution of 5 million, then clearinghouse capital, then surviving members' fund), what is the loss borne by surviving members' default fund contributions?

Surviving members bear 45 million. The 100 million loss is absorbed first by the defaulter's 40 million margin, then its 5 million fund contribution, then 10 million of clearinghouse capital, leaving 45 million for the mutualized default fund.

  1. A45 millionCorrect
  2. B55 million
  3. C60 million
  4. D50 million

Explanation

Loss 100 million. Defaulter's initial margin absorbs 40, leaving 60. Defaulter's fund contribution absorbs 5, leaving 55. Clearinghouse capital absorbs 10, leaving 45. Surviving members' fund bears 45, within the 90 available. A wrong answer of 55 skips the clearinghouse capital.

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