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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A risk manager argues that moving from bilateral to central clearing may increase procyclicality. Which mechanism most directly supports this concern?

The main procyclicality concern is that CCP margin models raise initial margin when volatility increases, so clearing members must post more collateral exactly when liquidity is scarce. This can force asset sales and amplify market stress. CCPs still collect variation margin, and defaulters pay first in the waterfall.

  1. ACCPs raise initial margin when volatility rises, draining liquidity from members in stressCorrect
  2. BCCPs eliminate variation margin, so losses accumulate unseen
  3. CCCPs reduce the number of eligible collateral types to cash only, lowering margin calls
  4. DCCPs mutualise all losses before using the defaulter's margin

Explanation

Volatility-sensitive margin models increase initial margin requirements in stressed markets, forcing members to source liquidity when it is scarce, amplifying stress. CCPs collect variation margin daily, so the second option is wrong.

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