Explanation:
Step 1: Understand the Loss Absorption Sequence The typical CCP loss absorption waterfall follows this order:
Step 2: Calculate Resources Used
Step 3: Remaining Loss to be Covered Total loss = 75 units Loss covered by first three layers = 55 units Remaining loss = 75 - 55 = 20 units
Step 4: Cover Remaining Loss from Default Fund The remaining 20 units are covered from the Default Fund reserve of non-defaulting members.
Step 5: Calculate Initial Default Fund Reserve
Step 6: Calculate Remaining Default Fund Reserve
Answer: B. 160
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Q-88. In the context of Central Counterparties (CCPs), which play a critical role in mitigating systemic risk in financial markets by acting as intermediaries between buyers and sellers, the loss absorption waterfall defines the sequence of financial resources used to cover losses from a member's default. This mechanism ensures market stability and protects non-defaulting members. Now a CCP with 10 clearing members faces a default by one member, resulting in a total loss of 75 units. Key parameters include:
What is the remaining Default Fund Reserve after absorbing the loss?
A
180
B
160
C
140
D
120