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

A risk manager reviews a CSA that has a high minimum transfer amount and a weekly margin call frequency, compared with a similar CSA with a low minimum transfer amount and daily calls. Which statement about the first CSA is most accurate?

The weekly, high-MTA CSA leaves more uncollateralised exposure. Small exposure changes below the minimum transfer amount are not called, and infrequent calls lengthen the margin period of risk, so collateral lags market moves. It does not remove wrong-way risk or guarantee full collateralisation.

  1. AIt leaves a larger uncollateralised exposure, because small exposure changes go uncalled and collateral lags market movesCorrect
  2. BIt reduces the margin period of risk because fewer calls are made
  3. CIt removes wrong-way risk for the derivative position
  4. DIt guarantees that exposure is always fully collateralised

Explanation

A high MTA means exposure moves below that size are not collateralised, and less frequent calls lengthen the time between valuation and receipt of collateral, so the margin period of risk rises. Residual exposure is therefore greater. Fewer calls do not shorten the margin period of risk, and no CSA feature guarantees full collateralisation or removes wrong-way risk.

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