Explanation:
The credit rating of a derivatives product company or DPC does not depend on its ability to mutualize the loss amongst counterparties and market participants; it is the role of the central counterparty in exchanges. The ratings of the DPC depend on three functions:
Q.841 Derivative Product Companies or DPCs are typically triple-A rated independently capitalized entities created by one or more banks as a bankruptcy-remote subsidiary of a major dealer. The purpose of DPCs is to provide external counterparties with a degree of protection against counterparty risk by protecting against the default of the parent bank or parent company. Which of the following is least likely a determinant of DPCs' triple-A ratings?
A
The ability to mutualise the default loss amongst other counterparties and another market participant.
B
The support from the parent company and the transferability of the risk to the well-capitalized firm in case the parent company defaults.
C
The capability of credit risk management, and providing operation guidelines to external counterparties to control credit quality.
D
The ability of the DPC to minimize market risk.
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