FRM Part II · FRM Exam Part II · Central Clearing
A dealer bank moves a portfolio of bilateral interest rate swaps with a single counterparty into a central counterparty (CCP). Both the bank's exposure to that counterparty and the counterparty's exposure to the bank were previously netted bilaterally. Which is the most direct benefit the bank obtains from the move to the CCP?
The main benefit is multilateral netting. Because the CCP stands between all members, offsetting positions with different counterparties can be netted against each other, reducing gross exposures. Market risk stays, margin is still required, and member defaults remain possible.
- AElimination of all market risk on the swaps
- BMultilateral netting across all clearing members' positions, which reduces gross exposuresCorrect
- CRemoval of the need to post any margin
- DA guarantee that no clearing member will ever default
Explanation
A CCP becomes the counterparty to every trade, so offsetting positions with different counterparties can be netted multilaterally, reducing overall exposure. Market risk remains, margin is still required, and CCPs do not make member default impossible.
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