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FRM Part I · FRM Exam Part I · Central Clearing

Which of the following is a recognized moral hazard concern associated with central clearing?

A recognized concern is moral hazard: because the CCP guarantees performance and losses can be shared across members, participants have less incentive to scrutinize the creditworthiness of their trading partners. Margin is still required, and trade repositories only store data rather than guarantee trades.

  1. AMembers may monitor each other's risk more closely because they share losses
  2. BMargin requirements become unnecessary once trades are novated
  3. CMembers may take less care in assessing counterparties because the CCP stands behind trades and losses are mutualizedCorrect
  4. DTrade repositories begin to guarantee the performance of trades

Explanation

When the CCP becomes the counterparty and losses can be mutualized, participants have less incentive to evaluate the creditworthiness of those they trade with, creating moral hazard. Margin remains essential, and trade repositories only record data.

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