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FRM Part I · FRM Exam Part I · Central Clearing

A concern raised about mandatory central clearing is that a CCP becomes a single point of failure. Which statement best describes why a CCP failure could be systemically severe?

A CCP concentrates counterparty risk from many members in one entity. If a default exhausts its margin, default fund and capital, losses and liquidity demands spread to all members simultaneously, making failure systemically severe, even though CCPs do hold collateral.

  1. ACCPs hold no collateral, so any member default causes immediate failure
  2. BCCPs concentrate counterparty risk across many members, so losses beyond its resources could hit all members simultaneouslyCorrect
  3. CCCP failure only affects the defaulting member's own positions
  4. DCCPs are exempt from default-fund contributions, so losses are borne by regulators

Explanation

Concentration of exposures means a CCP failure would transmit losses and liquidity strains to all clearing members and their clients at once. CCPs do hold margin and default funds, and losses are not confined to the defaulter once the waterfall is exhausted.

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