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FRM Part I · FRM Exam Part I · Swaps

Under post-crisis regulatory reforms, which feature applies to standardized interest rate swaps between dealers?

Standardized interest rate swaps between dealers must be centrally cleared through a CCP, which collects initial and variation margin from members. This reduces and manages counterparty credit risk, though it does not eliminate it.

  1. AThey must be cleared through a central counterparty, which requires initial and variation marginCorrect
  2. BThey must be traded only on exchanges that eliminate all counterparty risk
  3. CThey are exempt from margin requirements if both parties are banks
  4. DThey must be settled bilaterally with no collateral to preserve liquidity

Explanation

Reforms require standardized OTC derivatives to be centrally cleared, with CCPs collecting initial and variation margin. This does not eliminate risk but mutualizes and manages it. Bilateral uncollateralized settlement and bank exemptions run against the reforms.

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