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 only collected from buy-side clients, while the Default Fund is only paid into by clearing members.
- The Default Fund is held in cash while Initial Margin is always held in illiquid securities, making IM harder to redistribute.
- Regulators require IM to be kept at a third-party custodian to prevent the CCP from accessing it in any scenario.
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