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FRM Part II · FRM Exam Part II · Central Clearing

A risk manager at a clearing member reviews its exposure to a CCP's loss mutualization. Which feature of the CCP's default fund design most directly increases the clearing member's potential loss from the default of another member?

Large or unlimited assessment rights most increase a surviving member's potential loss. They allow the CCP to call more cash beyond the pre-funded default fund contribution, so the member's exposure to another member's default is uncapped, whereas more margin or CCP capital absorbs losses before mutualization.

  1. AA high level of initial margin collected from each member
  2. BA large CCP skin-in-the-game contribution placed before the survivors' funds
  3. CUnlimited or large rights of the CCP to call additional assessments from surviving membersCorrect
  4. DSegregation of client positions with portability arrangements

Explanation

Assessment powers let the CCP demand further funds beyond pre-funded contributions, so a surviving member's loss from another's default can exceed its deposited contribution. Higher initial margin and CCP skin in the game reduce mutualized losses, and portability does not raise mutualized exposure.

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