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FRM Part I · FRM Exam Part I · Introduction to Derivatives

Two banks enter a bilateral OTC interest rate swap. Under the post-crisis regulatory framework for standardized OTC derivatives, which change is most directly intended to reduce the systemic risk from this transaction?

Requiring standardized OTC swaps to be centrally cleared through a CCP and reported to trade repositories most directly reduces systemic risk. The CCP becomes counterparty to both sides, nets exposures and enforces margining, while reporting improves regulators' visibility of positions.

  1. ARequiring the swap to be centrally cleared through a central counterparty (CCP) and reported to a trade repositoryCorrect
  2. BProhibiting banks from using swaps for hedging
  3. CRequiring both banks to hold identical positions
  4. DEliminating all collateral requirements between the banks

Explanation

Post-crisis reforms push standardized OTC derivatives to central clearing and require trade reporting, which interposes a CCP between counterparties, nets exposures, and improves transparency. Banning hedging is not a reform goal, and removing collateral would raise rather than reduce risk.

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