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FRM Part I · FRM Exam Part I · Futures Markets

A clearinghouse member's clearing account holds a long position and a short position in the same contract through different customers. The clearinghouse requires margin on a net basis for the clearing member's own account but on a gross basis for customer positions. What is the main risk-management reason for the gross treatment of customer positions?

Gross margining of customer positions is used because opposite positions often belong to different customers. If one defaults, the other's position still exists, so netting would understate the clearinghouse's exposure.

  1. ACustomers' offsetting positions may belong to different customers, so netting them would not reduce the exposure if one customer defaultsCorrect
  2. BIt increases the clearinghouse's fee revenue per trade
  3. CGross margining eliminates the need for daily marking to market
  4. DCustomer positions carry no default risk, so margin is only a formality

Explanation

Offsetting positions of different customers are not truly hedged against each other. If one customer defaults, the other's position remains and the clearinghouse is still exposed, so the margin must cover each position separately. The fee, mark-to-market and no-default statements are incorrect.

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