Explanation:
D is the correct answer.
Reputational risk is the risk that the CCP's reputation will be damaged, which could lead to a loss of business or a decrease in its ability to raise capital. However, this risk is not likely to occur until after the CCP has suffered a significant loss, which would likely force other members to share in the losses.
The other risks are more likely to occur before other members are forced to share in the losses:
A is incorrect. If a clearing member defaults, the CCP will auction off its portfolio to other members. If the auction fails, the CCP will be forced to bear the losses itself.
B is incorrect. If another clearing member is in distress, it may be unable to meet its obligations to the CCP. This could lead to a loss for the CCP, which would then be forced to allocate the loss to other members.
C is incorrect. If a clearing member resigns from the CCP, it will no longer be able to share in the losses of other members. This could increase the risk of losses for the CCP, which would then be forced to allocate the losses to other members.
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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.