Skip to content

FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

A risk officer reviews a proposal to improve resolution of a large dealer bank. Which proposal best matches the idea of a 'temporary stay' on early termination rights of derivative and repo counterparties?

A temporary stay delays the early termination and collateral liquidation rights of derivative and repo counterparties for a short period after the dealer enters resolution. This gives authorities time to transfer positions to a sound entity and reduces destabilizing fire sales of collateral.

  1. ARaising the minimum leverage ratio for the dealer's trading book
  2. BRequiring all repo to be cleared through a central counterparty
  3. CDelaying counterparties' close-out rights for a short period after the dealer enters resolutionCorrect
  4. DProhibiting the dealer from using client assets for rehypothecation

Explanation

A temporary stay pauses close-out and collateral sale rights briefly, giving the resolution authority time to transfer contracts to a solvent entity and limiting fire sales. The other options address leverage, clearing or rehypothecation, not a stay.

Did you get it right without looking?

One question tells you little. A timed set on The Failure Mechanics of Dealer Banks shows your real accuracy, how long you take and where you lose marks.

Practise The Failure Mechanics of Dealer BanksFree diagnostic mock

More The Failure Mechanics of Dealer Banks questions