Explanation:
Because the central counterparty is the primary risk buffer, the member counterparties have decreased transparency of credit risk. When market volatility increases, margin requirements are often increased, which is an example of procyclicality. Netting reduces the risks for both parties in a centrally cleared transaction. Loss impact is usually lessened in a centrally cleared framework due to loss mutualization.
(Book 3, Module 32.1, LO 32.c)
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Question 97
Which of the following concepts is considered to be a disadvantage of central clearing?
A
Counterparties have a decreased ability to assess credit risk.
B
Margin requirements are often relaxed during periods of market duress to relieve downward market pressure.
C
Transaction netting provides a layer of risk for the counterparties in a gaining position.
D
The impact of a loss is typically increased using a centrally cleared framework.
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