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Answer: CCPs are unlikely to fail, due to margins, but if a CCP fails, a redeeming quality is that its bailout should be relatively simple
**C is false.** Gregory states that CCPs can fail, and if one does, the bailout could be a more complex and sizable task than even the bailouts of banks and financial institutions such as Bear Stearns and AIG. - **A is true**: CCPs do have disadvantages, including moral hazard, adverse selection, and possible pro-cyclical effects. - **B is true**: The number of CCPs is likely to be relatively large because of bifurcation at both regional and product levels. - **D is true**: Under the idea of a "conservation of risk," CCPs do not eliminate counterparty risk; they transform it into other forms.
Author: Manit Arora
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Question 1.3. Each of the following arguments about the future of central counterparties (CCPs) is true, according to Gregory,⁴ except which is FALSE?
A
CCP disadvantages include vulnerability to moral hazard and adverse selection, and the possibility of pro-cyclical effects
B
It seems likely that there will be a relatively large number of CCPs due to bifurcation on two levels: regional and product
C
CCPs are unlikely to fail, due to margins, but if a CCP fails, a redeeming quality is that its bailout should be relatively simple
D
In accordance with a sort of "conservation of risk" principal, CCP will not so much reduce counterparty risk as transform it into different forms
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