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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A dealer has a bilateral portfolio with a client. The CSA has a threshold of USD 5 million, a minimum transfer amount (MTA) of USD 0.5 million, and no initial margin. The portfolio is currently worth USD 12 million to the dealer, and the client has posted USD 6.4 million. Assuming the call is made and met, what additional variation margin is transferred to the dealer?

The dealer receives an additional USD 0.6 million. Required collateral is exposure less the USD 5 million threshold, or USD 7 million. With USD 6.4 million already held, the shortfall is USD 0.6 million, which exceeds the USD 0.5 million minimum transfer amount.

  1. AUSD 0.6 millionCorrect
  2. BUSD 12.0 million
  3. CUSD 5.6 million
  4. DUSD 0.0 million as the call is below the MTA

Explanation

Required collateral = exposure minus threshold = 12 − 5 = 7 million. Already held is 6.4 million, so the call is 0.6 million, which exceeds the 0.5 million MTA and is therefore transferred. USD 5.6 million forgets the existing collateral and uses the wrong base, and USD 12 million ignores the threshold.

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