Answer: ABC's operational risk

The correct answer is D. The use of a central clearinghouse to handle the transactions executed between XYZ's main funding source, ABC, and ABC's client, Repo Co., would likely have resulted in a reduction in ABC's operational risk. If a clearinghouse had been used and it made a mistake (operational risk) like that made by ABC, ABC would have recourse to the clearinghouse, and therefore, it would have reduced its operational risk exposure. The clearinghouse acts as an intermediary between the transacting parties, ensuring that all transactions are settled correctly and reducing the risk of operational errors or fraud. In this case, if ABC had used a clearinghouse, it could have potentially avoided the fraud committed by Repo Co., as the clearinghouse would have verified the collateral provided by Repo Co. before executing the transaction. This would have mitigated the operational risk faced by ABC, as they would have been protected against the consequences of the fraud.

Author: LeetQuiz Editorial Team