Ultimate access to all questions.
Explanation:
When a clearing member defaults, the CCP must manage the default, which may include auctioning off the defaulting member's positions. If this fails (failed auction), the CCP may have to use the default fund. The prospect of having their default fund contributions depleted and facing further assessments may lead other clearing members to resign (resignation of clearing members). The CCP also faces reputational risk if it has to rely heavily on mutualized resources. However, the distress of other clearing members is typically a consequence after they are forced to absorb significant losses, not a risk that is primarily faced before they are forced to share in the losses.
No comments yet.
Q.7 Fiona Stan is a lecturer on the subject of derivatives at Rheinfall University. During the lecture regarding the risk faced by the central counterparty, she mentioned that one of the major risks faced by the CCP is the risk that arises when allocating the default loss of one clearing member to other clearing members. Though all members agree with this method, some members believe it's unfair to allocate a loss to clearing members just because they have sufficient funds and positive positions. Which of the following risks is least likely to be faced by the CCP before other members are forced to share in the losses?
A
Failed auction.
B
Distress of other clearing members.
C
Resignation of clearing members.
D
Reputational risk.