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FRM Part II · FRM Exam Part II · Central Clearing

A regulator worries that mandatory clearing of derivatives increases procyclicality. Which mechanism best supports this concern?

The procyclicality concern is that CCP margin models raise initial margin when volatility rises, so members must post more liquid collateral exactly when funding is scarce. This liquidity drain can force asset sales and amplify market stress, which is a recognised cost of central clearing.

  1. ACCPs raise initial margin models' requirements in volatile periods, draining liquidity from members when markets are already stressedCorrect
  2. BCCPs eliminate variation margin during stress to prevent liquidity drains
  3. CBilateral netting sets become larger after clearing, increasing exposures in stress
  4. DCCPs reduce transparency of prices so participants cannot assess positions

Explanation

Margin models respond to higher volatility, so initial margin calls rise in stress, requiring members to find liquid assets when funding is tight, which can amplify market moves. CCPs do not remove variation margin, clearing generally increases transparency, and netting sets are not enlarged in a way that supports the concern.

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