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FRM Part II · FRM Exam Part II · Derivatives

A regulator worries that mandatory central clearing increases procyclicality. A CCP uses a margin model that is highly sensitive to recent volatility. In a sudden market stress, which outcome is the most likely concern and the most appropriate mitigant?

The concern is that margin calls surge when volatility rises, draining members' liquidity and amplifying stress. The appropriate mitigant is an anti-procyclicality tool, such as a stressed-period floor or a margin buffer built in calm times, which smooths margin changes over the cycle.

  1. AMargin calls spike as volatility rises, draining member liquidity; mitigate with anti-procyclicality tools such as a stressed-period floor or margin buffersCorrect
  2. BMargin falls as volatility rises; mitigate by shortening the margin period of risk
  3. CVariation margin is eliminated; mitigate by raising default fund contributions only
  4. DNetting sets are broken up; mitigate by moving trades to bilateral contracts

Explanation

Volatility-sensitive models raise initial margin exactly when liquidity is scarce, forcing asset sales and amplifying stress. Anti-procyclicality measures such as stressed lookback floors, buffers that build in calm periods, or limits on margin increases dampen this. The other options misstate the direction of margin or the nature of the tools.

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