FRM Part I · FRM Exam Part I · Central Clearing
A regulator requires standardized OTC derivatives between major dealers to be cleared through a central counterparty (CCP). Which of the following is the most direct risk-reduction benefit the reform is intended to deliver?
The main intended benefit is replacing many bilateral counterparty exposures with exposure to the CCP and allowing multilateral netting. This reduces credit risk and contagion. It does not remove market risk, collateral requirements, or guarantee liquidity in stress.
- AElimination of market risk on cleared contracts
- BReplacement of a web of bilateral counterparty exposures with exposures to the CCP, with multilateral nettingCorrect
- CRemoval of the need for any collateral between dealers
- DGuaranteed liquidity of all cleared contracts in stressed markets
Explanation
Central clearing substitutes the CCP as counterparty to each clearing member and allows multilateral netting, reducing bilateral credit exposures and contagion. Market risk remains with the position holders. Collateral is still required through initial and variation margin, and liquidity is not guaranteed.
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