FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement
A risk manager argues that mandatory central clearing of OTC derivatives could create new systemic risk. Which concern is most consistent with this view?
The main concern is concentration: clearing places large volumes of risk in a small number of CCPs, so the failure of one, or sharp procyclical margin calls in stress, could spread losses and liquidity strains across many members and markets.
- AConcentration of risk in a few CCPs, whose failure would transmit losses across many membersCorrect
- BClearing eliminates the need for any margin, increasing leverage
- CClearing prevents netting of offsetting positions across members
- DClearing makes all trades bilateral again
Explanation
CCPs concentrate counterparty risk, so a CCP failure or procyclical margin calls in stress could spread losses widely. Clearing in fact requires margin and enables multilateral netting, so the other statements are false.
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