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FRM Part I · FRM Exam Part I · Central Clearing

Which of the following is the main reason a CCP typically increases initial margin requirements during periods of high market volatility?

A CCP raises initial margin in volatile markets to keep coverage of potential close-out losses at its target confidence level. Greater volatility enlarges possible price moves over the liquidation period, so more collateral is needed, even though this can add procyclical liquidity strain.

  1. ATo limit procyclicality only by lowering margins
  2. BTo maintain coverage of potential close-out losses at the target confidence levelCorrect
  3. CTo eliminate the need for variation margin
  4. DTo reduce the size of the default fund to zero

Explanation

Higher volatility raises potential losses over the margin period of risk, so the CCP must hold more initial margin to keep the target coverage. This can be procyclical, not the reverse. Variation margin remains necessary and the default fund is still required for extreme events.

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