FRM Part I · FRM Exam Part I · Central Clearing
Which statement best describes the main purpose of initial margin at a central counterparty (CCP)?
Initial margin protects the CCP against potential losses that may arise between a member's last variation margin payment and the close-out of its portfolio. It is a defaulter-pays buffer sized to the margin period of risk, unlike variation margin, which settles current mark-to-market, or the default fund, which is mutualized.
- AIt covers potential losses on a defaulting member's portfolio during the close-out period, beyond the variation margin already collectedCorrect
- BIt transfers daily realized gains and losses between members to reflect current market prices
- CIt mutualizes losses among surviving members after the defaulter's resources are exhausted
- DIt compensates the CCP for its operating and clearing fees
Explanation
Initial margin is a defaulter-pays buffer sized to cover potential future exposure over the margin period of risk. Variation margin handles daily mark-to-market, and default fund contributions mutualize losses beyond the defaulter's own margin.
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