medium · FRM Part 2 Credit Risk
A Central Counterparty (CCP) manages member defaults using a structured waterfall.
According to standard practice, in which order are the following resources consumed to cover losses from a member's default?
- Surviving members' mutualized default fund contributions are consumed first, followed by the CCP's own equity, and only then the defaulter's initial margin.
- The CCP's own equity capital is used first, followed next by the defaulter's posted initial margin, and only then the defaulter's remaining default fund contribution.
- Defaulter's Initial Margin rightarrow Defaulter's Default Fund Contribution rightarrow CCP's Equity rightarrow Surviving Members' Default Fund Contributions.
- Defaulter's initial margin is used first, then the surviving members' mutualized default fund contributions, and only afterward the defaulter's own default fund contribution.
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