Answer-first summary for fast verification
Answer: Model risk
**Correct answer: B. Model risk** CCPs are especially exposed to **model risk** because margin systems—particularly **initial margin models**—must estimate potential future exposure using assumptions about volatility, correlations, tail behavior, and wrong-way risk. If those assumptions are wrong or too simplistic, the CCP can under-margin risk. Why the other choices are less suitable: - **Legal risk**: related to enforceability of rules/contracts, not the main issue described here. - **Default risk**: CCPs manage member default risk, but the prompt focuses on the risk embedded in margin modeling. - **Liquidity risk**: important for CCPs, but the wording here is specifically about model sensitivity to market dynamics.
Author: Manit Arora
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Q-605.1. To which risk are central counterparties (CCPs) MOST exposed when they require margin—especially initial margin because initial margin generally imposes linearity—such that problems can arise "with respect to volatility, tail risk, complex dependencies and wrong-way risk"?
A
Legal risk
B
Model risk
C
Default risk
D
Liquidity risk
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