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

Under the BCBS-IOSCO uncleared margin framework, which feature applies to initial margin collected from a covered counterparty?

Initial margin must be exchanged gross and held so it is protected if the collecting party defaults, with rehypothecation severely limited or prohibited. It is not netted between counterparties, and it must be eligible, liquid collateral rather than unsecured promises.

  1. AIt must be exchanged gross and held so it is protected on default, with limited or no rehypothecationCorrect
  2. BIt may be netted between the two parties so only the difference is exchanged
  3. CIt may be posted as unsecured promissory notes
  4. DIt is exchanged only if the exposure is in-the-money to the collector

Explanation

The framework requires IM to be exchanged gross (no netting of the two parties' amounts) and to be segregated and protected on default, with rehypothecation tightly restricted. Netting IM, unsecured notes and one-sided exchange conflict with it.

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