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

Under the post-crisis framework for non-centrally cleared OTC derivatives between two financial institutions, which margin requirement applies?

Covered financial institutions trading non-centrally cleared derivatives must exchange both variation margin and initial margin. Variation margin covers current mark-to-market exposure, while initial margin covers potential future exposure and is segregated to protect the poster if the collector defaults.

  1. AOnly initial margin, with no variation margin
  2. BNeither margin type, provided both parties have investment-grade ratings
  3. CBoth variation margin and initial margin, with initial margin segregated so it is protected in defaultCorrect
  4. DOnly variation margin, posted to a CCP default fund

Explanation

Uncleared margin rules require daily variation margin to reflect current exposure and initial margin to cover potential future exposure during close-out. Initial margin is held segregated so the posting party is protected if the collecting party defaults. Ratings do not exempt financial counterparties, and no CCP default fund is involved in bilateral trades.

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