Explanation:
Both statements made by Isabell Engler are indeed accurate. Central counterparties (CCPs) play different roles in exchanges and over-the-counter (OTC) markets due to the inherent characteristics of these two types of markets. In exchanges, transactions are standardized, meaning that the terms of the contracts (such as maturity and the grade of the underlying asset) are uniform across the board. This standardization allows for a more streamlined operational process, which is where the CCP comes in. The CCP's main goal in this context is to further standardize and enhance this operational process, making transactions smoother and more efficient. This is what Statement I refers to.
On the other hand, OTC markets are characterized by long-dated, customized, and illiquid contracts. These features make OTC markets more susceptible to counterparty risk (the risk that a party to a contract will not live up to their contractual obligations) and liquidity risk (the risk that a party will not be able to exit a position without incurring significant losses). Therefore, in OTC markets, the CCP's main goal is to mitigate these risks and maintain liquidity, as stated in Statement II.
Therefore, both statements accurately reflect the goals of CCPs in exchanges and OTC markets, respectively.
Q.846 Isabell Engler is a finance journalist who is currently working on a research paper focused on the difference between the goals of central counterparties in over-the-counter markets and in exchanges. She made the following statements in this regard:
I. One main goal of the central counterparty (CCP) is to standardize and enhance the operational process
II. On the other hand, another goal of the central counterparty (CCP) in over-the-counter markets is to mitigate counterparty risk and maintain liquidity
Which of her statements is/are correct?
A
Only statement I is correct.
B
Only statement II is correct.
C
Both statements are correct.
D
None of the statements is correct.
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