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FRM Part II · FRM Exam Part II · Central Clearing

When a CCP's default fund is exhausted and assessments on surviving members are also used up, which recovery tool allows the CCP to reduce amounts it owes to surviving members who have in-the-money positions?

Variation margin gains haircutting is the tool. The CCP pays surviving members with in-the-money positions less than the full variation margin owed, so the uncovered loss is spread across them after the default fund and assessments have been exhausted.

  1. AVariation margin gains haircuttingCorrect
  2. BIncreasing the defaulter's initial margin retrospectively
  3. CNovation of the defaulter's trades to a bilateral basis
  4. DRebating the clearing fees to members

Explanation

Variation margin gains haircutting (VMGH) lets the CCP pay out less than the full variation margin owed to members with gains, spreading the remaining loss. Margin cannot be raised retrospectively on a defaulted member, and the other options do not cover losses.

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