FRM Part II · FRM Exam Part II · Central Clearing
Five dealers each have bilateral OTC derivative positions with every other dealer. After all trades are novated to a single CCP, how does the number of counterparty credit relationships each dealer must monitor for these trades change, assuming each dealer is a clearing member?
The number falls from four to one. Before clearing each dealer faces four other dealers, but after novation each faces only the CCP. Credit risk is concentrated in the CCP rather than removed entirely.
- AIt falls from four to oneCorrect
- BIt rises from four to five
- CIt stays at four because exposure remains bilateral
- DIt falls from four to zero because the CCP removes all credit risk
Explanation
Bilaterally, each dealer faces the four other dealers. After novation each faces only the CCP, so one relationship. Credit risk is not eliminated; it is concentrated in the CCP, so zero is wrong.
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