FRM Part I · FRM Exam Part I · Central Clearing
During a sharp rise in market volatility, a CCP recalibrates its margin model and raises initial margin requirements. Which risk is most directly associated with this action for clearing members?
The most direct concern is procyclicality. When volatility rises and the CCP increases initial margin, members must post more collateral exactly when liquidity is scarce, which can amplify market stress and force asset sales. Mitigants include anti-procyclicality buffers and smoothing of margin parameters.
- AProcyclicality, because higher margin calls drain liquidity when members are already stressedCorrect
- BWrong-way risk, because the CCP's own credit quality declines as margins increase
- CBasis risk, because margin is posted in a different currency from the position
- DModel risk eliminated, because margin now fully covers any loss
Explanation
Raising margin in stress forces members to find liquid assets at the worst time, amplifying stress; this is procyclicality. Higher margin does not create wrong-way risk or eliminate model risk, and basis risk is unrelated to the recalibration itself.
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