FRM Part I · FRM Exam Part I · Central Clearing
In a bilateral over-the-counter derivatives market without central clearing, which feature most directly exposes a dealer to the risk that a counterparty fails to make a payment owed under a contract that has a positive value to the dealer?
Counterparty credit risk is the exposure. In a bilateral OTC trade, each party depends on the other to perform, so if the counterparty defaults while the contract is in the money, the dealer loses its replacement value. Default funds and exchange margining belong to central clearing.
- ACounterparty credit risk arising from the bilateral contractCorrect
- BExchange margin risk arising from daily settlement
- CDefault fund mutualization risk among clearing members
- DPosition limit risk imposed by the exchange
Explanation
In bilateral OTC trades each party bears the credit risk of the other. If the contract has positive value to the dealer and the counterparty defaults, the dealer loses the replacement value. Default funds and daily exchange settlement are features of central clearing, not bilateral trades.
Did you get it right without looking?
One question tells you little. A timed set on Central Clearing shows your real accuracy, how long you take and where you lose marks.
More Central Clearing questions
- A clearing member holds a long futures position cleared by a CCP. The contract was entered at 1,250.00, the contract multiplier is 100, and …
- Two banks, A and B, have three OTC derivative trades between them under a single legally enforceable netting agreement. The current mark-to-…
- Which risk is most directly concentrated by the use of a CCP, making its resilience a systemic concern?
- Two dealers have a bilateral OTC portfolio. Under the credit support annex, the portfolio's net value to Dealer X is +USD 18 million. Dealer…
- A concern raised about mandatory central clearing is that it concentrates risk in a few central counterparties (CCPs). Which statement best …
- Which statement best describes a key risk concentration created by moving OTC derivatives into central clearing?