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FRM Part II · FRM Exam Part II · Derivatives

A dealer has two offsetting-risk portfolios of OTC derivatives with a single counterparty. Moving them into one CCP, versus holding them bilaterally across several CCPs and non-cleared netting sets, is under consideration. Which statement best describes the effect of clearing at multiple CCPs rather than at one CCP on the dealer's total exposure?

Netting benefits are reduced. Offsetting positions can be netted only within the same CCP, so splitting them across several CCPs leaves each side margined separately. This raises total margin and exposure compared with clearing the whole portfolio at a single CCP.

  1. ANetting benefits are reduced because offsetting positions cleared at different CCPs cannot be netted against each otherCorrect
  2. BNetting benefits increase because each CCP adds its own default fund
  3. CMargin requirements fall because risks are diversified across CCPs
  4. DExposure is unchanged because netting is determined by the bank's legal entity only

Explanation

Netting occurs within a CCP, not across CCPs. Splitting offsetting trades across CCPs means each CCP margins its gross side separately, raising total margin and exposure. Having more CCPs does not recreate cross-CCP netting.

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