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FRM Part II · FRM Exam Part II · Central Clearing

Which feature of CCPs most directly addresses the problem that, in a bilateral market, a dealer's default could trigger sudden losses to many counterparties at once?

Daily variation margin combined with a default waterfall, mutualised loss-absorbing resources and a coordinated close-out process. These tools prevent exposures from building up and give a predictable way to handle a member default, limiting contagion that arises in uncoordinated bilateral closeouts.

  1. ADaily variation margin and a default waterfall with mutualised resources and a coordinated close-out processCorrect
  2. BElimination of all market risk on cleared positions
  3. CAllowing members to choose their own margin methodology
  4. DRemoving the need for any capital held against cleared trades

Explanation

Variation margin removes accumulated exposure daily, and the waterfall and orderly close-out spread and contain losses. CCPs do not eliminate market risk, do not let members set their own margins, and capital is still required for exposures to CCPs.

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