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Answer: Moral hazard — Procyclicality
## Explanation Let's analyze the two concerns: **1. Decline in willingness to monitor credit risk** - This describes **Moral Hazard** - when one party takes on more risk because another party bears the cost of that risk. In this case, clearing members may become less diligent in monitoring counterparty credit risk because the CCP assumes most of the default risk. **2. Higher margin requirements during market stress** - This describes **Procyclicality** - when margin requirements increase during market downturns, potentially exacerbating the downturn by forcing market participants to post more collateral when they can least afford it. Let's evaluate the options: - **A. Moral hazard — Procyclicality** ✅ Correct match - **B. Adverse selection — Offsetting** ❌ Adverse selection occurs before the transaction, not about monitoring behavior - **C. Moral hazard — Offsetting** ❌ Second term is incorrect - **D. Adverse selection — Procyclicality** ❌ First term is incorrect Therefore, option A correctly identifies both concepts.
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Q-21. Alex Dell, a derivatives trader, has some reservations about the central clearing of OTC derivatives with a central counterparty (CCP). Specifically, he is worried that clearing members' willingness to monitor credit risk may decline since the CCP assumes most of the risks, and that CCPs may increase margin requirements during a period of market stress. Which of the following concepts best describe Dell's reservations?
Decline in Willingness — Higher Margin Requirements
A
Moral hazard — Procyclicality
B
Adverse selection — Offsetting
C
Moral hazard — Offsetting
D
Adverse selection — Procyclicality