Skip to content

FRM Part II · FRM Exam Part II · Central Clearing

Dealer A has three bilateral trades with Dealer B with mark-to-market values to A of +40, -15 and +25 (USD million) with no netting agreement, and A has no other exposure to B. If instead all three trades were novated to a CCP with multilateral netting across them, what is the effect on A's exposure to its counterparty?

Exposure falls from 65 to 50 million. Without netting, only positive values count, giving 40 plus 25. With CCP netting the trades combine to 40 minus 15 plus 25, which is 50, so the negative trade offsets part of the positive exposure.

  1. AExposure falls from 65 to 50 because only the positive trades are netted against the negativeCorrect
  2. BExposure falls from 65 to 40 because only the largest trade remains
  3. CExposure is unchanged at 65 because novation does not affect exposure
  4. DExposure rises to 80 because the CCP adds a default fund exposure

Explanation

Without netting, exposure is the sum of positive values: 40+25=65. With netting at the CCP, exposure is the net value: 40-15+25=50. The 40 option wrongly keeps only the largest trade. Novation with netting does change exposure.

Did you get it right without looking?

One question tells you little. A timed set on Central Clearing shows your real accuracy, how long you take and where you lose marks.

Practise Central ClearingFree diagnostic mock

More Central Clearing questions