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FRM Part I · FRM Exam Part I · Central Clearing

Which statement best describes a key risk concentration created by moving OTC derivatives into central clearing?

The CCP becomes a single point of failure. Because it stands between all members, its failure would spread losses across the market, so its risk management, margin models and default resources are critical. Clearing actually improves multilateral netting, requires margin, and generally increases transparency.

  1. AThe CCP becomes a single point of failure, so its robustness is critical to financial stabilityCorrect
  2. BBilateral counterparty credit risk increases because trades can no longer be netted
  3. CTransparency about market positions is reduced compared with bilateral trading
  4. DClearing members no longer need to post any collateral for cleared trades

Explanation

Central clearing concentrates counterparty risk in the CCP, making it systemically important. Clearing improves netting and typically requires initial and variation margin, and generally improves transparency.

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