FRM Part I · FRM Exam Part I · Central Clearing
Which feature of a CCP's default waterfall correctly describes the usual order in which losses from a defaulting clearing member are absorbed?
Losses are absorbed first by the defaulter's own initial margin and default fund contribution, then by a layer of the CCP's own capital, and only then by the mutualized default fund contributions of surviving members. This defaulter-pays ordering aligns incentives and limits contagion.
- ASurviving members' default fund contributions first, then the defaulter's initial margin
- BThe CCP's equity first, then surviving members' default fund contributions, then the defaulter's margin
- CThe defaulter's initial margin and default fund contribution, then the CCP's own capital contribution, then surviving members' default fund contributionsCorrect
- DTaxpayer funds first, then the defaulter's initial margin
Explanation
The defaulter pays first: its initial margin and its own default fund contribution. Then a tranche of CCP capital (skin in the game) is used, followed by the mutualized default fund contributions of surviving members. Using survivors' funds before the defaulter's resources would be inconsistent with the defaulter-pays principle.
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