FRM Part II · FRM Exam Part II · Derivatives
A risk manager reviews a CCP's default fund sizing policy. Which standard best reflects the 'Cover 2' principle commonly applied to systemically important CCPs?
Cover 2 requires a systemically important CCP to hold sufficient financial resources to withstand the simultaneous default of the two participants, with their affiliates, that would cause the largest aggregate exposure, under extreme but plausible market conditions.
- AFinancial resources must cover the default of the single largest member only, under normal conditions
- BFinancial resources must cover the default of the two largest members and their affiliates under extreme but plausible market conditionsCorrect
- CFinancial resources must cover the default of half of all members under average conditions
- DFinancial resources must equal twice the total initial margin held
Explanation
Cover 2 requires a systemically important CCP to hold enough pre-funded resources to withstand the default of the two participants (with affiliates) causing the largest aggregate credit exposure, in extreme but plausible conditions. Cover 1 refers to the single largest, and the other options are not standards.
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