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FRM Part II · FRM Exam Part II · Derivatives

Regulators have pushed standardised OTC derivatives into central clearing. Which is a recognised risk that this policy concentrates in the financial system?

Central clearing concentrates counterparty and operational risk in a few systemically important CCPs, whose failure would transmit stress across the system. It reduces bilateral opacity but increases liquidity demands through margin calls, so the concentration of risk in CCPs is the recognised drawback.

  1. AConcentration of counterparty and operational risk in a few CCPs that become systemically importantCorrect
  2. BElimination of liquidity risk from margin calls
  3. CGreater opacity of bilateral exposures
  4. DRemoval of all wrong-way risk

Explanation

Clearing reduces bilateral interconnectedness but concentrates risk in a small number of CCPs, making them too important to fail. It also creates liquidity demands from margin calls, especially procyclical ones, so the claim that liquidity risk is eliminated is false, and transparency generally improves.

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