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FRM Part I · FRM Exam Part I · Central Clearing

A concern raised about mandatory central clearing is that it concentrates risk in a few central counterparties (CCPs). Which statement best describes why a CCP default would be particularly severe?

Because a CCP becomes the counterparty to every cleared trade through novation, its failure would hit many clearing members and markets simultaneously. This concentration makes CCPs systemically important, even though they collect margin and maintain default funds to absorb member defaults.

  1. ACCPs are exempt from margin requirements, so losses are never covered
  2. BA CCP is the counterparty to every cleared trade, so its failure would simultaneously disrupt many clearing members and marketsCorrect
  3. CA CCP default eliminates all obligations of clearing members on open trades
  4. DA CCP holds no default fund, so members bear no mutualized exposure

Explanation

Through novation the CCP becomes buyer to every seller and seller to every buyer, so it is systemically concentrated. Its failure would hit many members at once. CCPs do impose margin and maintain default funds, so the other statements are false.

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