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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

Which feature of initial margin differs from variation margin in bilateral OTC derivatives under the post-crisis uncleared margin framework?

Initial margin is a buffer against potential future exposure arising during the close-out period after a default, and under the uncleared margin rules it is exchanged by both parties and held segregated without rehypothecation. Variation margin, by contrast, tracks current mark-to-market moves.

  1. AInitial margin covers potential future exposure during close-out and must be segregated so it is not rehypothecatedCorrect
  2. BInitial margin reflects current mark-to-market changes and is exchanged daily
  3. CInitial margin is paid only by the party that is out of the money
  4. DInitial margin can be freely reused by the receiving party

Explanation

Initial margin protects against potential future moves in value during the close-out period, and under the uncleared margin rules it is posted by both parties and held segregated, not rehypothecated. Variation margin reflects current mark-to-market changes. Posting by both sides and no free reuse rule out the other options.

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