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What is a key difference between initial margin and default fund requirements for clearing members?
A
Initial margin provides coverage with a high level of confidence, while default funds are used to mitigate extreme losses through mutualization, thus making clearing cost-effective but potentially increasing moral hazard.
B
Initial margin requirements are significantly larger compared to default funds, which may lead to increased moral hazard but ensure better behavior, whereas default funds contribute to overall loss absorbency and systemic stability.
C
Initial margin breaches are extremely rare and can lead to substantial losses which spreading risk among clearing members and clients.
D
Default funds are updated more frequently than initial margins and are typically calibrated via stress tests to cover potential losses from multiple clearing member defaults and extreme market conditions.
