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FRM Part I · FRM Exam Part I · Central Clearing

Two dealers have a bilateral OTC portfolio with a net mark-to-market of $20 million in favor of Dealer X, under a CSA with a zero threshold and zero minimum transfer amount. Dealer Y currently holds posted collateral from X of $0 and X holds none from Y. Which statement correctly describes the collateral call after valuation?

Dealer Y posts $20 million of variation margin to Dealer X. Variation margin flows from the party whose position has lost value to the party holding the gain, and with zero threshold and zero minimum transfer the entire net mark-to-market is collateralized, removing X's exposure.

  1. ADealer Y posts $20 million of variation margin to Dealer XCorrect
  2. BDealer X posts $20 million of variation margin to Dealer Y
  3. CBoth dealers post $20 million each into a central pool
  4. DNo transfer is needed until a default occurs

Explanation

Variation margin is passed from the party that owes value (the out-of-the-money side) to the party with positive net value. Dealer X is in the money by $20 million, so Y delivers $20 million, reducing X's exposure to zero. Posting by X would worsen Y's position and reverse the direction.

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