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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

A regulator introduces higher capital charges for non-centrally cleared OTC derivatives compared with centrally cleared ones. What is the primary intended effect of this policy?

Higher capital charges on non-centrally cleared derivatives are meant to encourage central clearing and to reflect the greater counterparty risk in bilateral trades. They do not remove market risk, ban trades with end users, or substitute for trade repositories, which serve transparency.

  1. ATo eliminate market risk from derivatives positions
  2. BTo incentivize the use of central clearing and reflect the greater counterparty risk of bilateral tradesCorrect
  3. CTo make trades with non-financial end users illegal
  4. DTo reduce the need for trade repositories

Explanation

Higher capital charges make bilateral trades more expensive, nudging market participants toward central clearing, which mutualizes and manages counterparty risk. It does not remove market risk, ban end-user trades, or replace repositories.

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