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FRM Part II · FRM Exam Part II · Central Clearing

A risk manager argues that central clearing of standardized derivatives can increase systemic risk even though it reduces bilateral counterparty risk. Which statement best supports this argument?

Central clearing concentrates counterparty risk in a small number of CCPs. If one fails, losses can reach many clearing members simultaneously, making the CCP a potential single point of failure and a systemic risk, even though bilateral exposures have fallen.

  1. ACCPs concentrate risk, so the failure of one CCP could transmit losses to many clearing members at onceCorrect
  2. BCCPs eliminate the need for netting, so exposures grow
  3. CCentral clearing makes all derivatives less standardized
  4. DCCPs charge no initial margin, encouraging excess leverage

Explanation

Clearing concentrates counterparty risk in a few CCPs that become single points of failure, so a CCP failure could hit many members simultaneously. The other options are factually wrong: CCPs rely on netting, promote standardization, and collect initial margin.

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