Principles of Clearing and Margin Flashcards
novation definition
the substitution of a new contract in place of an old one,
after clearing members dealt -> trade registration with CCP and then CCP guarantees performance of contract to own members
what is a mutual guarantee (waterfall process)
defaulting member’s margin,
defaulting member’s contributions to default fund,
other member’s contributions to default fund,
clearing house’s own funds
(never use other members margin)
what is SPAN
standard portfolio analysis of risk. collects all derivative positions of clearing member into portfolios and calculates risk of each portfolio,
used by various exchanges across globe and groups derivatives contracts by assets and calculates the risk of each portfolio,
calculates how much initial margin should be taken
Once a trade has been allocated or given up to the global clearer, which of the following occurs?
AExecuting broker’s exposure to counterparty risk ceases BGlobal clearer assumes 50% of the exposure to counterparty risk CExposure to counterparty risk remains entirely with the executing broker DExposure to counterparty risk remains entirely with the client
Executing broker’s exposure to counterparty risk ceases,
Once the trade has been allocated the executing broker’s exposure to counterparty risk ceases.
Client A buys a future through Broker A. Client B sells the future through Broker B. Which of the following best describes the flow of variation margin?
AClient A - broker A - client B - broker B BClient A - broker A - broker B - client B CClient A - broker A - client B DClient A - clearing house - client B
Client A - broker A - broker B - client B,
We are assuming here that the clients are not clearing members of the clearing house but the brokers are clearing members.
Which of the following best describes the main role of TIMs?
ACredit and counterparty risk management BCalculating option portfolio margins CProviding guaranteed settlement for derivatives positions DFacilitating hedging positions for fund managers
Calculating option portfolio margins,
TIMS is best used for calculating margin for option portfolios.
A clearing house would use a protected payment system for:
AA registration system BA trading system CA margin system DA payment collection system
A payment collection system,
Clearing houses use protected payment systems to collect margin owed via an automatic debit from bank accounts of members.
When a exchange member passes a trade to another member this is called:
AAssignment BNovation CMatching DA give-up
A give-up,
This is the process of allocation or ‘give-ups’. Usually this is separating the process of trade execution and then passing the trade to a clearing member to clear.
What adjustment is made to the calculated SPAN scanning risk to adjust for offsetting futures positions?
ASpot month charges BVariation margin CInter-commodity spread margin DShort-option minimum charge
Inter-commodity spread margin,
When calculating scanning risk an adjustment is made to take account of inter-commodity spreads: e.g. long-gilt future, short-bund future. Because these two positions offset each others’ risk, at least to a certain extent, the adjustment is subtracted from scanning risk. Note that inter-commodity spread margin is also called inter-commodity credit.
When the Delta of an option increases, which of the following is most likely?
AVariation margin paid by the short will increase BVariation margin paid by the long will decrease CVariation margin paid by the short will decrease DVariation margin paid by the long will increase
Variation margin paid by the short will increase ,
The risk of exercise against the short will rise, hence their variation margin payments are likely to be greater since the option is moving further in-to-the-money.
Between the clearing house and a general clearing member, which of the following are true regarding exchange options on futures?
IPremiums are paid upfront
IILong-option positions are margined daily
IIIOption positions are margined any time up to expiry
IVOnly short-option positions are margined
AI and II BII and III CIII and IV DI and IV
II and III ,
Options on futures (buy or sell) are margined in the same way as futures contracts. Premiums are paid at exercise or expiry, whichever occurs earlier.
Which of the following risks does novation remove entirely?
ASettlement risk BPrincipal risk CMember counterparty risk DTrading risk
Member counterparty risk ,
Counterparty risk is removed by the clearing house becoming the central counterparty on trades.
Which of the following actions would a broker take if a client misses a variation margin call?
AClose the position BCover the amount using other client accounts CCover the amount using the house account DNo action required
Cover the amount using the house account
