FRM Part II · FRM Exam Part II · Central Clearing
A risk manager compares gross bilateral exposures with exposures after novation to a CCP. Dealer A has three uncleared swaps with Dealer B with mark-to-market values of +40, -25 and +10 (USD million) to A, and none of these are subject to a netting agreement, while the same trades are then all cleared at one CCP under multilateral netting. Considering only these three trades, what is A's credit exposure to B bilaterally without netting, and to the CCP once cleared (before margin)?
Exposure is USD 50 million bilaterally without netting, being the sum of the positive values 40 and 10, and USD 25 million to the CCP, because netting offsets the negative 25 against the positives to give 40 minus 25 plus 10.
- AUSD 50 million bilaterally; USD 25 million to the CCPCorrect
- BUSD 25 million bilaterally; USD 50 million to the CCP
- CUSD 50 million bilaterally; USD 50 million to the CCP
- DUSD 25 million bilaterally; USD 25 million to the CCP
Explanation
Without netting, exposure is the sum of positive values: 40+10=50. With netting at the CCP, exposure is the net value: 40-25+10=25. The reverse option confuses which case is netted.
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