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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

A risk manager argues that mandatory central clearing of OTC derivatives may create new risks even though it reduces bilateral counterparty risk. Which concern is most consistent with this argument?

The main concern is concentration: mandatory clearing channels large volumes of trades through a few CCPs, which become systemically important and potential single points of failure. Clearing also raises margin demands, so the risk shifts rather than disappears.

  1. AConcentration of risk in a few CCPs, which makes them systemically important and potential single points of failureCorrect
  2. BThe elimination of margin requirements on standardised swaps
  3. CA rise in bilateral credit exposure on cleared trades
  4. DThe inability of CCPs to value standardised contracts daily

Explanation

Clearing concentrates exposures in a small number of CCPs, which become systemically important, so a CCP failure could transmit stress widely. Margin requirements rise, not vanish, with clearing. Bilateral exposure on cleared trades is replaced by CCP exposure, and CCPs do value positions daily.

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