FRM Part I · FRM Exam Part I · Central Clearing
Which risk is most directly concentrated by the use of a CCP, making its resilience a systemic concern?
The main concentrated risk is CCP failure. After novation the CCP is counterparty to every cleared trade, so counterparty risk is concentrated in a single entity. If it failed, losses would spread across all clearing members, which is why CCP resilience is a systemic concern.
- AThe risk that bilateral counterparties cannot agree on trade terms
- BThe risk that the CCP itself fails, since it becomes counterparty to all cleared tradesCorrect
- CThe risk that each member's trade valuation is no longer observable
- DThe risk that cleared trades cannot be standardised
Explanation
Novation places the CCP in the middle of every cleared trade, so counterparty risk is concentrated in one entity. Its failure would affect all members. The other options are not the main concentration effect of clearing.
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