Answer-first summary for fast verification
Answer: Market risk
**Correct answer: A — Market risk.** After novation, the CCP becomes the counterparty to both sides of the trade, so it is exposed to the **market risk** of the positions it has taken on. Why the others are false: - **B**: While the CCP’s exposure is often discussed in terms of conditional/default-related exposure, the standard clear answer here is **market risk**. - **C**: The CCP does not inherit only market risk; it also faces operational and default-management exposures in practice. - **D**: Novation does not immunize the CCP from risk. The CCP still faces market risk and must manage credit risk through margin, default funds, and other safeguards.
Author: Manit Arora
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Q-603.2. Novation, which is critical to central clearing, is the legal process whereby the central counterparty (CCP) positions itself between the buyer and seller by replacing a contract with one or more other contracts. After novation, which risk(s) does the CCP bear?
A
Market risk
B
Conditional market risk
C
Novation implies that the CCP inherits only market risk
D
Novation ensures that the CCP is immunized from credit and market risk
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