medium · FRM Part 2 Credit Risk
A central counterparty (CCP) uses a 'default waterfall' to manage the risk of a clearing member failure.
Which of the following best describes the purpose of the CCP's 'skin in the game' within this hierarchy?
- To act as a buffer that permanently prevents Variation Margin Gains Haircutting from ever being triggered under any conceivable default scenario.
- To provide clearing members with full principal protection against any loss arising from the CCP's own proprietary investment portfolio, no matter the cause.
- To align the CCP's incentives with those of surviving members by ensuring the CCP's own capital is at risk before the mutualized default fund is used.
- To replace initial margin entirely as the sole primary layer of defense used against small-scale clearing member defaults.
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