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FRM Part I · FRM Exam Part I · Central Clearing

Dealer D has these bilateral OTC exposures, in USD millions, with three counterparties: +50 and -30 with E, +40 with F, and -45 with G (positive means D is owed). Netting is permitted only within each counterparty and all trades are with E, F, G. After all trades are cleared at one CCP with multilateral netting, what is D's net exposure (all trades netted with the CCP), and what was its total bilateral positive net exposure beforehand?

D's net exposure to the CCP is 15 million, from 50 - 30 + 40 - 45. Before clearing its positive bilateral net exposure was 60 million, being 20 to E and 40 to F, since the 45 owed to G could not offset those amounts.

  1. ANet 15 with CCP; bilateral positive exposure 90
  2. BNet 15 with CCP; bilateral positive exposure 60Correct
  3. CNet 15 with CCP; bilateral positive exposure 60 and CCP exposure is positive 90
  4. DNet 35 with CCP; bilateral positive exposure 60

Explanation

Bilateral nets: E +50-30 = +20; F +40; G -45. Positive exposure is 20+40 = 60 (G is negative, so it is not netted against the others). With the CCP, all trades net: 50-30+40-45 = +15. Option 0 sums gross positives 50+40 without netting E. Option 3 misses G's offset.

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