Explanation:
The default fund is a collective pool of resources from clearing members designed to absorb losses that exceed the amount covered by an individual member's initial margin. This shared resource is vital for offering protection to the CCP against extreme loss scenarios that might arise from a member's default.
A is incorrect. Daily liquidity adjustments are the function of the variation margin, not the default fund.
B is incorrect. While the CCP does incur operational costs, the default fund's primary purpose is to safeguard against losses exceeding individual margins due to member defaults, not for infrastructure investment.
D is incorrect. Interest payments to members on excess cash are a separate function and are not directly related to the role of the default fund in risk management.
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Q.6098 When assessing the protective measures posed by initial and variation margins collected by the Central Counterparty (CCP), one must understand the default fund's contribution to the broader framework of risk management. What role does the default fund play in the CCP's risk absorption mechanism?
A
The default fund provides daily liquidity adjustments based on the marked-to-market valuation of portfolios.
B
It allows the CCP to invest in technology and infrastructure development from the pooled resources.
C
It is a collectivized pool of resources utilized to absorb losses that may exceed individual members' initial margins.
D
It is a mechanism to provide interest payments to members on the excess cash deposited as an initial margin.
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