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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

Regulators encourage central clearing of standardised OTC derivatives, but some analysts warn about a side effect during stress. Which concern is most directly linked to CCP margin practices?

The main concern is procyclicality: CCP margin models respond to higher volatility by raising initial and variation margin requirements in stress, so members face large calls for liquid collateral when funding is tight. This can amplify market stress, rather than reduce netting or transparency.

  1. AProcyclical margin calls that raise liquidity demands on members when volatility risesCorrect
  2. BComplete loss of multilateral netting benefits across asset classes
  3. CElimination of the need for members to hold liquid assets
  4. DReduced transparency because trades are no longer reported anywhere

Explanation

CCP margin models are sensitive to volatility, so margin requirements rise in stress, forcing members to post more liquid collateral exactly when funding is scarce. This is the procyclicality concern. Clearing generally increases, not eliminates, netting and transparency, and it raises rather than removes liquidity needs.

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