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FRM Part II · FRM Exam Part II · Central Clearing

Dealer A has three bilateral OTC derivative positions with different counterparties, with mark-to-market values of +80, -50 and +30 (USD million, from A's perspective). Dealer A moves all three into a single CCP, where they fall in the same netting set with the CCP, and no other positions exist. Ignoring collateral, what is A's exposure to counterparty default before and after clearing?

Before clearing the exposure is 110 million, because only the positive-value trades with separate counterparties count (80 plus 30). After clearing, the trades net with the CCP to 60 million (80 minus 50 plus 30). Multilateral netting through the CCP reduces exposure.

  1. ABefore 110, after 60Correct
  2. BBefore 110, after 0 because the CCP nets to zero
  3. CBefore 60, after 60
  4. DBefore 80, after 110

Explanation

Bilaterally the trades are with different counterparties, so no netting across them: exposure is only the positive values, 80 + 30 = 110. After clearing the net value is 80 - 50 + 30 = 60, so exposure to the CCP is 60. Option 'after 0' wrongly assumes net value is zero.

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