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Explanation:
Statement C is false. The total market value (or notional amount) of all outstanding OTC derivative contracts is not necessarily the best measure of systemic risk; rather, the net credit exposure (after accounting for netting and collateral) is a much more relevant measure. Furthermore, master swap agreements do significantly reduce actual risks because they provide the legal framework for close-out netting in the event of default, effectively reducing gross exposures to net exposures. Statements A, B, and D are true descriptions of the operations and characteristics of dealer banks.
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809.1. Duffie explains that the main business lines of large dealer banks are: (1) securities dealing, underwriting, and trading; (2) over-the-counter derivatives; and (3) prime brokerage and asset management. About these main business lines, each of the following statements is true EXCEPT which is false?
A
A tri-party repo agreement (between the dealer, the investor and a clearing bank) is used to mitigate counterparty risk and/or reduce burden of collateral management
B
For most over-the-counter (OTC) derivatives, one of the counterparties is a dealer who typically lays off much (or all) of the risk of its client-initiated trades by running a matched book
C
With respect to over-the-counter (OTC) derivatives, the best measure of their systemic risk is the total market value of all outstanding contracts; further, master swap agreements do not reduce their actual risks (although they do lower the administrative burden of OTC derivative contracts)
D
Some large dealers are Prime Brokers who provide clients a range of services including management of securities holdings, clearing, cash-management, securities lending, financing, reporting (e.g., risk measurement), and tax accounting