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Explanation:
Bilateral clearing can add opacity to the market because it is less standardized and decentralized, which can obscure the overall picture of market exposures. On the other hand, central clearing, with the presence of a CCP, can provide a clearer overall view and consolidation of exposures, thus enhancing transparency.
A is incorrect. Individual assessments of counterparty risk in bilateral clearing do not guarantee market-wide transparency, as each trade is individual and decentralized.
C is incorrect. Bilateral clearing’s use of credit rating agencies is not the primary factor contributing to market opacity.
D is incorrect. While bilateral agreements can be detailed, this doesn't necessarily result in greater overall market transparency compared to the aggregation achieved through central clearing.
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Q.6106 When contrasting bilateral with central clearing, opacity in risk exposure is a critical point. In what way does bilateral clearing contribute to transparency or opacity in the market compared to central clearing?
A
Bilateral clearing promotes transparency as individual agreements allow market participants to directly assess counterparty risk.
B
Central clearing channels risk through a CCP, which provides a consolidated view of market exposures, while bilateral clearing obscures these exposures due to its decentralized nature
C
Bilateral clearing is more opaque because it relies on external credit rating agencies to evaluate and disclose counterparty risk to the market.
D
The customizable nature of bilateral trades means that market risk assessments are clear and detailed, in contrast to the homogenized representations in central clearing.