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Explanation:
Macro-hedging is utilized by CCPs to diminish the portfolio's exposure to major market risk factors, consequently reducing the market risk that a CCP confronts. This approach is a proactive risk management practice during periods of member default.
A is incorrect. While transaction fees contribute to the CCP's revenue, they are not dynamically increased in response to a member default as a primary risk management strategy.
C is incorrect. CCPs require members to contribute to a default fund, but additional capital calls are not standard practice for managing risk after one member's default. Instead, targeted strategies such as auctions and porting client trades are employed.
D is incorrect. Limiting the number of cleared transactions is not how CCPs typically manage risk. CCPs have measures in place, such as collecting margins and managing default funds, to handle the risks associated with the transactions they clear.
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Q.6099 A Central Counterparty (CCP) encounters a diversity of risks by standing in the middle of financial transactions and acting as the counterparty to both the buyer and the seller. One of the primary risks faced by a CCP is member default. Which of the following is a method used by CCPs to manage counterparty risk?
A
Increasing transaction fees to augment the default fund after a member has defaulted.
B
Macro-hedging to minimize exposure to major market risk factors and reduce the market risk faced by the CCP.
C
Mandating additional capital contributions from all members regardless of their exposure or default probability.
D
Reducing the number of transactions cleared to limit potential defaults and associated market risks.