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

A dealer moves from daily to weekly remargining for a portfolio of uncleared OTC derivatives, with all other CSA terms unchanged. Which is the most likely effect on its counterparty credit risk measurement?

The effective margin period of risk lengthens, so modelled expected exposure and CVA increase. Weekly remargining leaves value changes uncollateralised for longer before a default can be closed out, so more market movement is exposed than under daily margin calls.

  1. AThe effective MPOR lengthens, so expected exposure and CVA riseCorrect
  2. BThe MPOR shortens because fewer calls reduce disputes
  3. CExposure is unchanged because variation margin fully offsets all moves
  4. DWrong-way risk is eliminated because collateral is exchanged less often

Explanation

Less frequent remargining extends the period in which the portfolio value can move without collateral adjustment, which adds to the MPOR. Longer MPOR increases the modelled exposure and therefore CVA. Fewer calls do not reduce close-out time and do not remove wrong-way risk.

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