CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
In a futures market with a clearinghouse, the clearinghouse most likely reduces counterparty credit risk because it:
The clearinghouse reduces counterparty credit risk by acting as the buyer to every seller and the seller to every buyer, guaranteeing performance of each contract. Parties then face the clearinghouse instead of each other. It does not set prices or pre-fund members' margin deposits.
- Aguarantees the performance of every contract by becoming the counterparty to each clearing memberCorrect
- Bfixes futures prices each day so that they cannot move
- Cpays the margin deposits of members that default
Explanation
The clearinghouse interposes itself as buyer to every seller and seller to every buyer, so each party faces the clearinghouse rather than the original counterparty. It does not fix prices, and defaults are covered from the defaulter's margin and the clearing fund, not by paying members' margin in advance.
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