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FRM Part II · FRM Exam Part II · Central Clearing

A risk manager at a clearing member argues that the CCP's default fund should be sized on a 'Cover 2' basis. What does this standard mean?

Cover 2 means the CCP's pre-funded resources must be sufficient to withstand the simultaneous default of the two clearing members, with their affiliates, that would generate the largest credit exposure under extreme but plausible market conditions, rather than a fixed multiple of margin or capital.

  1. AThe fund must cover the default of the two largest members under extreme but plausible conditionsCorrect
  2. BThe fund must cover twice the largest member's initial margin
  3. CThe fund must cover the default of any two members chosen at random
  4. DThe fund must be twice the CCP's own capital

Explanation

Cover 2 requires financial resources sufficient to withstand the default of the two participants (with affiliates) causing the largest aggregate credit exposure in extreme but plausible market conditions. It is not a multiple of margin or capital.

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