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FRM Part II · FRM Exam Part II · Central Clearing

During a stress period, a CCP sharply raises initial margin requirements as market volatility spikes. Which risk does this behavior most directly create for clearing members?

The risk is procyclicality. Volatility-sensitive margin models increase initial margin in stress, so members face large liquidity demands for cash or collateral just when funding is scarce, which can force asset sales and amplify market stress.

  1. AProcyclicality, as higher margin calls drain liquidity when members are least able to fund themCorrect
  2. BReduced transparency of trade prices
  3. CLoss of multilateral netting benefits
  4. DIncreased bilateral credit exposure to each other

Explanation

Margin models that react to volatility raise requirements in stress, forcing members to find cash or high-quality collateral at the worst time, which can amplify market stress. Netting and bilateral exposure are not directly affected.

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