medium · FRM Part 2 Credit Risk
In the context of Central Counterparty (CCP) risk management, what is the primary structural reason why Initial Margin (IM) is not mutualized, whereas Default Fund contributions are?
- Initial Margin is designed to cover the specific risk of a member's own portfolio, whereas the Default Fund covers tail losses exceeding a defaulter's collateral.
- Initial Margin is collected only from buy-side clients trading via the CCP, while Default Fund contributions are funded solely by clearing members themselves.
- The Default Fund is always held strictly in cash, whereas Initial Margin is invariably posted only in illiquid securities, complicating any redistribution.
- Regulators simply mandate that Initial Margin always sit with a third-party custodian so that the CCP itself can never access it under any circumstances whatsoever.
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