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Explanation:
The default fund contributions by the defaulter serve as an additional layer of defense in the CCP's loss waterfall. They are accessed only when the initial margin is inadequate to cover the losses incurred by the defaulting party.
B is incorrect. Default fund contributions are not meant to reimburse initial margins. They are used to absorb default losses that are not covered by the initial margin.
C is incorrect. While a CCP may negotiate bailout terms in extreme scenarios, default fund contributions are not used as leverage in such negotiations. Their primary purpose is loss absorption for member defaults.
D is incorrect. The contributions to the default fund are intended for default loss absorption, not infrastructure investment.
Things to Remember
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Q.6103 Following the initial margin, the default fund contributions by the defaulting member come into play as part of the CCP's loss waterfall. In what way do these default fund contributions operate within the loss waterfall of a CCP?
A
They act as a second layer of financial defense, utilized when the initial margin is insufficient to cover the defaulting party's losses.
B
Default fund contributions are used to reimburse the initial margin of non-defaulting members as a form of compensation.
C
They provide additional leverage for the CCP to negotiate bailout terms with central banks and other financial institutions.
D
These contributions serve as a mandatory reserve to enhance the CCP's technology infrastructure for better risk management.