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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

Under post-crisis OTC reforms, which pairing of requirements most accurately reflects the treatment of non-centrally cleared derivatives versus centrally cleared standardized derivatives?

Reforms make non-cleared OTC derivatives more expensive through higher capital charges and mandatory bilateral margin, creating an incentive to centrally clear standardized products, which themselves remain subject to initial and variation margin at the CCP.

  1. ANon-cleared derivatives face higher capital and bilateral margin requirements to encourage clearing of standardized productsCorrect
  2. BNon-cleared derivatives face lower capital to preserve customization, with no margin
  3. CCleared derivatives require no margin because the CCP guarantees performance
  4. DOnly exchange-traded derivatives are subject to reform; all OTC trades are exempt

Explanation

Reforms use mandatory clearing for standardized contracts and make non-cleared trades costlier through higher capital charges and margin rules (initial and variation), creating incentives to clear. Cleared trades still post margin.

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