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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Under post-crisis reforms, a dealer's bilateral, non-centrally cleared OTC derivatives portfolio with another financial institution becomes subject to mandatory margin requirements. Which pair of margin types is required for such uncleared trades?

Non-centrally cleared OTC trades between covered institutions require variation margin, which tracks current mark-to-market exposure, and initial margin, which covers potential future exposure during close-out. Initial margin is exchanged by both sides and segregated. Default fund contributions apply to central counterparties, not to bilateral trades.

  1. AInitial margin only, posted by the dealer but not collected
  2. BVariation margin only, collected annually
  3. CVariation margin to reflect current mark-to-market exposure, and initial margin held to cover potential future exposure, segregated from the receiverCorrect
  4. DDefault fund contributions to a CCP and a rating-based haircut

Explanation

Uncleared margin rules require both variation margin (daily mark-to-market) and initial margin (covering potential close-out losses), with initial margin exchanged by both parties and segregated so the receiver cannot reuse it. Default fund contributions relate to CCPs, not bilateral trades.

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