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

Under a bilateral CSA, a dealer holds cash collateral that it is permitted to reuse, and the agreement is described as a title-transfer arrangement. Compared with a pledge arrangement in which the collateral taker has no right of reuse, which statement is most accurate?

Under title transfer, ownership of the collateral passes to the taker, who may reuse it. The giver is left with only a contractual claim to get equivalent assets back, so it is an unsecured creditor if the taker defaults.

  1. ATitle transfer typically gives the collateral taker ownership and the right to use the asset, but the giver then has an unsecured claim for its returnCorrect
  2. BTitle transfer always leaves ownership with the collateral giver, who can recall it at any time
  3. CTitle transfer eliminates the collateral giver's exposure to the taker's default
  4. DTitle transfer prevents the collateral from being netted in close-out

Explanation

In title transfer, ownership passes to the taker, who can reuse it, while the giver holds only a contractual claim for equivalent assets. If the taker defaults, the giver is therefore an unsecured creditor for the excess. The other options misstate ownership, risk elimination or netting.

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