Explanation:
Option III is incorrect because, like any other financial institutions, the central counterparty can also fail.
Option I is correct. The increase of margin requirements can absorb the liquidity of the party, which can result in increased counterparty risk or default risk.
Option II is correct. It is true that the central party doesn’t eliminate counterparty risk completely, but, in fact, it centralizes the risk by acting as the counterparty to every party.
Section: Financial Markets and Products
Chapter: Central Clearing
Learning objectives:
Ultimate access to all questions.
Q.55 Which of the following statements is (are) incorrect regarding central counterparties (CCP)?
I. The margining activity of the central counterparty decreases risk, but in some cases, it can also increase risk
II. The central counterparty does not make counterparty risk disappear; rather, it centralizes and converts counterparty risk into different forms of financial risk
III. Unlike other financial institutions, the central counterparty cannot fail
A
I only
B
III only
C
I and II
D
I and III
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