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FRM Part II · FRM Exam Part II · Central Clearing

Under the Basel default fund capital framework for exposures to a QCCP, the hypothetical capital requirement K_CCP is computed by the CCP. A clearing member's default fund capital charge is most directly driven by which combination of inputs?

The default fund capital charge depends on the CCP's hypothetical capital K_CCP, the CCP's own funds, and the member's share of the pre-funded default fund. It is not based on notional, ratings, revenue or equity volatility, which are not inputs.

  1. AThe member's initial margin posted and the CCP's total revenue
  2. BThe member's default fund contribution relative to the total pre-funded default fund, together with K_CCP and the CCP's own fundsCorrect
  3. CThe member's notional of cleared trades and the CCP's credit rating
  4. DThe member's variation margin received and the volatility of the CCP's equity price

Explanation

The Basel formula allocates the CCP's hypothetical capital K_CCP across members using the pre-funded default fund contributions, taking into account the CCP's own contribution (skin in the game) and the total fund size. Notional, ratings, revenue or equity volatility are not inputs.

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