FRM Part I · FRM Exam Part I · Central Clearing

Dealer A has three OTC derivative trades with Dealer B with mark-to-market values to A of +$40 million, -$15 million and +$10 million. Dealer A also has one trade with Dealer C valued at -$30 million to A. All trades are bilateral with legally enforceable netting within each pair, and no collateral is posted. If all four trades were instead novated to a CCP with the same netting, what is the change in Dealer A's total credit exposure (the sum of positive net exposures to counterparties) from the bilateral case to the CCP case?

Exposure falls by $30 million. Bilaterally, Dealer A's net with B is +$35 million, and the -$30 million with C gives no exposure, so total is $35 million. With a CCP everything nets to +$5 million. The reduction is $35 million minus $5 million, or $30 million.

AIncrease of $5 million
BDecrease of $0 million, no change
CDecrease of $35 million
DDecrease of $30 millionCorrect

Explanation

Bilateral: net with B = 40-15+10 = +35, net with C = -30 so exposure zero; total exposure = 35. With the CCP all trades net to 40-15+10-30 = +5. Exposure falls from 35 to 5, a decrease of 30. The $35 million answer wrongly sets CCP exposure to zero.

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