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FRM Part I · FRM Exam Part I · Central Clearing

Which feature of a CCP's margin framework is most directly intended to reduce the procyclicality of initial margin requirements?

Using margin models with a stressed-period or through-the-cycle floor best reduces procyclicality. It keeps initial margin from falling too far in calm markets, so increases during stress are smaller and less likely to force fire sales or liquidity strains on members.

  1. AUsing margin models with a stressed-period or through-the-cycle floor so requirements do not fall sharply in calm marketsCorrect
  2. BCollecting variation margin only at the end of each week
  3. CRaising initial margin only after a clearing member defaults
  4. DReplacing initial margin with a larger default fund

Explanation

Procyclicality arises when margins spike in stress and drop in calm periods. Stressed-period inputs or floors keep requirements more stable, so increases in a crisis are smaller. Weekly variation margin increases exposure, reacting only after defaults is too late, and substituting the default fund shifts losses to non-defaulters.

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