Explanation:
In bilateral clearing, derivative trades are cleared directly between two counterparties based on custom agreements (such as an ISDA Master Agreement). This lack of standardization allows for direct negotiation but leads to variable margin requirements and inconsistent cost structures across different trades and counterparties. In contrast, central clearing through a Central Counterparty (CCP) establishes standardized margin requirements and requires contributions to a default fund, which helps homogenize risk but does not necessarily "eliminate" costs (making C incorrect). Central clearing is not universally higher in cost (making B incorrect), and bilateral clearing is not highly predictable due to standardized practices (making D incorrect).
Ultimate access to all questions.
Q.24 Considering the costs associated with clearing trades, which of the following statements accurately reflects the cost dynamics of central clearing when compared to bilateral clearing?
A
Bilateral clearing involves direct negotiation of costs and may result in variable margin requirements, leading to potentially inconsistent cost structures.
B
Central clearing consistently has higher cost structures due to the standardization of margin requirements, regardless of the market conditions.
C
CCPs eliminate the costs associated with trade clearing by pooling risk, thus removing the necessity for individual default funds or margins from members.
D
In bilateral clearing, the higher predictability of costs is due to standardized practices that lead to uniform pricing models across all trades.
No comments yet.