Explanation:
The structure of clearing costs in central clearing is characterized by the segregation of initial margin and default fund contributions. The initial margin aims to address individual members' risk, with each member pre-funding their own potential exposure. As a result, a member's costs are directly linked to their trades' risk profile. On the contrary, contributions to the default fund are pooled among all members, reflecting a mutualized defense against losses that exceed any individual member's pre-funded initial margin. This structure spreads the impact of a loss event over the broader member base, resulting in a more balanced and perhaps lower financial burden for each member, thus achieving a predictable cost structure for dealing with defaults.
B is incorrect. The costs that members incur in complying with initial margin and default fund requirements directly impact the overall cost of clearing.
C is incorrect. Default fund contributions do not eliminate the need for individual risk assessment or margin calculation; they act as an additional safety net for when initial margins are insufficient.
D is incorrect. While initial margins may have a liquidity requirement, this does not necessarily make default fund contributions more appealing, as the overall cost of clearing includes both components.
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Q.6109 Clearing members in central clearing are required to post initial margin and contribute to a default fund. When viewing these requirements from a cost-of-clearing perspective, how do initial margin and default fund compliance affect the clearing cost for individual members?
A
Initial margins are a preventive cost absorbed individually, while default fund contributions are a mutualized cost shared among members, leading to a predictable cost structure
B
Compliance with both initial margin and default fund requirements has no impact on the cost of clearing as these are neutralized by the CCP's risk management practices.
C
Default fund contributions directly reduce the cost of clearing for each member because they eliminate the need for individual risk assessment and margin calculation.
D
The high liquidity requirement for initial margins substantially increases the cost of clearing, making the contributions to the default fund more appealing financially.