Question #1 of 11 Question ID: 1281030

Regarding the impact of central clearing on the broader nancial markets, which of the

following central counterparty functions could potentially increase systematic risk? CCPs:

A) address counterparty risk by providing o setting positions through netting.

B) provide transparency for the market.

C) improve liquidity for the market.

require members to post higher initial margin during times of increased market
D)
volatility.

Question #2 of 11 Question ID: 1281028

With respect to margin, counterparties must post both initial margin and variation margin
with a central counterparty (CCP). Which of the following statements pertains to variation

margin? Variation margin:

adjusts contract prices to changes in the market value of the underlying asset, or to
A)
changes in the reference rate or currency.

B) acts as the rst bu er against member defaults and reduces counterparty risk.

C) cannot be rehypothecated or reused as margin for other transactions.

D) is the rst line of defense against potential losses in a member default scenario.

Question #3 of 11 Question ID: 1281025

Which of the following advantages of the central clearing process could potentially lead to
problems in the form of moral hazard and/or adverse selection?

A member’s losses are distributed among all surviving members, which spread the
A)
impact of losses, reduce costs, and minimize market impact and systemic risk.

Member defaults are centrally managed through the auction process which
B)
minimizes price disruptions.
 The daily margining of products in a centrally-cleared market ensures greater
C)
transparency in product valuation, which increases product liquidity.

By transacting through a CCP, duplicate bilateral contracts can be o set, which

D)
improves exibility for new transactions and reduces costs.

Question #4 of 11 Question ID: 1281031

Regarding risks faced by central counterparties (CCPs), which of the following statements
most likely describes concentration risk? Concentration risk refers to:

the risk of clearing members, margins, or both that are located in a single
A)
geographic area.

the risk that exposure to a counterparty is negatively correlated with the credit
B)
quality of the counterparty.

the risk of losses of margin funds resulting from investment actions performed
C)
within or outside of the stated investment policy.

the risk that a foreign government could default on its debt obligations, thereby
D)
causing members to fail.

Question #5 of 11 Question ID: 1281033

Central counterparties (CCPs) may be subjected to model risk given that over-the-counter

(OTC) derivatives are priced using valuation models that use mark-to-market functions. In
this case, model risk could arise due to errors pertaining to all of the following except:

A) tail risk.

B) complex dependencies.

C) volatility.

D) right-way risk.

Question #6 of 11 Question ID: 1281034

Counterparty X is a non-member of a central counterparty (CCP). Which of the following
statements is incorrectly associated with this counterparty?

A) Non-members are required to contribute to default funds.

Non-members face the risk of not being able to port their trades should the
B)
counterparty member default.

It is possible that clearing members are able to pass on losses to non-members,

C)
which would reduce the gains of non- members.

If a CCP fails, a non-member may be able to avoid losses so long as its counterparty
D)
is solvent.

Question #7 of 11 Question ID: 1281024

A central counterparty (CCP) interjects itself between over-the-counter (OTC) trades. Which
of the following statements is incorrect regarding a CCP's functions? The CCP:

A) reduces the risk of default or non-payment by a counterparty.

B) acts as the seller to each buyer and the buyer to each seller.

C) increases trade liquidity and transparency.

D) increases the interconnectedness of trades and of participants.

Question #8 of 11 Question ID: 1281026

Central clearing through central counterparties (CCPs) o ers numerous advantages. Which
of the following statements does not describe a potential bene t of central clearing?

CCPs and clearinghouses manage margin requirements and require both initial
A)
margin and variation margin payments.

CCPs represent a single point in the market system through which counterparty risk
B)
is concentrated.

Losses arising from a counterparty’s default are spread across all central clearing
C)
members.

D) Multilateral netting of trades allows entities to reduce their counterparty risk.

Question #9 of 11 Question ID: 1281027

Which of the following statements about margining in centrally cleared and bilateral markets
is incorrect?

CCPs normally set margin requirements based only on the risks of the members’
A)
transactions.

B) Margining by CCPs is stricter than in the OTC derivatives markets.

Variation margin is typically cash posted by a member to cover the daily net change
C)
of the member’s position.

Members with di erent credit risk will always post di erent amounts of initial
D)
margin.

Question #10 of 11 Question ID: 1281032

Which of the following statements is incorrect regarding the default of a clearing member
and its ow through e ects?

If default correlation is low among over-the-counter (OTC) derivatives market

A)
participants there may be default or distress of other clearing members.

In the event that a clearing member resigns from a CCP, the applicable initial
B)
margins and default funds must be returned to the resigning clearing member.

Some clearing members may resign from the central counterparty (CCP) after the
C)
default of another clearing member.

In the event of a failed auction, the CCP will be required to pass on the defaulting
D)
member’s losses.

Question #11 of 11 Question ID: 1281029

Assume that counterparty A owes counterparty B 150, counterparty B owes counterparty C

175, and counterparty C owes counterparty A 225. If a central counterparty (CCP) is used to
net these obligations, which of the following positions is correct?

A) Counterparty B pays the CCP 50.

B) The CCP pays counterparty A 75.

C) Counterparty C pays the CCP 25.

D) The CCP pays counterparty B 25.