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Derivatives > Principles of Clearing and Margin > Flashcards

Principles of Clearing and Margin Flashcards

1
Q

In relation to the order process, which is the correct order?

A

Trade verification, settlement and reconciliation

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2
Q

Which of the following best describes variation margin?

A

It is a cash deposit with a clearing house to cover adverse daily movements in futures positions beyond the previous day’s closing price

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3
Q

Novation moves which of the following risks?

A

Counterparty risk

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4
Q

Once a trade has been allocated or given up to the global clearer, which of the following occurs?

A

Executing broker’s exposure to counterparty risk ceases

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5
Q

Which type of margin is used by an exchange when there are sudden changes in market volatility?

A

Intra-day

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6
Q

Which of the following best describes the main role of TIMs?

A

Calculating option portfolio margins

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7
Q

When the Delta of an option increases, which of the following is most likely?

A

Variation margin paid by the short will increase

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8
Q

Collateral for initial margin payments deposited with a UK clearing house cannot be in which of the following forms?

A

Corporate bonds

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9
Q

A bank requests a ‘haircut’ on a deal. What are they requesting?

A

Higher collateral

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10
Q

Which of the following acts as central counterparty during novation?

A

A clearing house

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11
Q

What is the difference between the margin called by the clearing house and the margin arrangements between a private customer and their broker?

A

The clearing house only uses a single system for payments and margin

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12
Q

In SPAN, which of the following option positions can require variation margin payments?

A

Both option buyers and sellers

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13
Q

The role of counterparty to the buyer of an exchange-traded futures contract is taken over from the seller by:

A

A clearing house

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14
Q

A clearing house guarantees the trades of:

A

All clearing members

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15
Q

What is the purpose of price limits on derivatives exchanges?

A

To limit volatility

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16
Q

Which of the following risks does novation remove entirely?

A

Member counterparty risk

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17
Q

A mutual offset system allows an investor to open and close out positions in the same contract on different exchanges. Which exchanges offer a mutual offset for their Japanese Government Bond (JGB) products?

A

SGX and CME Group

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18
Q

Which of the following is NOT true of initial margin?

A

It is payable on short-futures positions only

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19
Q

When a exchange member passes a trade to another member this is called:

A

A give-up

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20
Q

The process of substituting a new contract for an old contract, or a new counterparty for the original counterparty, is known as:

A

Novation

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21
Q

Which of the following best describes the purpose of price limits?

A

Prevent the market moving too far too fast during a trading session

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22
Q

Which of the following is the best description of the principal-to-principal guarantee structure?

A

The guarantee operates between the clearing member and the clearing house

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23
Q

The maximum movement in price during the trading day would be known as

A

The intra-day range

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24
Q

Which of the following is an unacceptable form of collateral for initial margin of a FTSE 100 contract for differences?

A

FTSE 100 equities

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25
Q

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?

A

Client A - broker A - broker B - client B

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26
Q

Which statement best describes SPAN margin?

A

Maximum close-out cost of a defaulting member’s positions

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27
Q

When a bank maintains a slightly higher level of collateral at all times than the risk as currently measured, this is due to:

A

A haircut

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28
Q

A haircut

A

is where assets are valued for collateral purposes at less than their current market value.

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29
Q

Why is it important to capture a trade as soon as it has been struck?

A

Risk management purposes

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30
Q

Which of the following is a reason for position limits?

A

Limit exposure

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31
Q

What is the main reason for an exchange declaring in the contract specifications the mechanism through which it will calculate EDSP?

A

To ensure that price manipulation is avoided

32
Q

Which of the following is the best definition of the closing range?

A

The highest and lowest price during the closing period

33
Q

What is the best definition of clearing?

A

Recording and matching trades and maintaining positions

34
Q

The process by which a clearing house becomes the central counterparty to all transactions on derivatives exchanges is called:

A

Novation

35
Q

Under which of the following conditions might a broker pay margin money to a customer?

A

As a result of marking-to-market

36
Q

A trader sells futures on XYZ plc shares. If he is unable to meet his commitments, which body will be responsible for making payments to compensate the counterparties?

A

The clearing house

37
Q

Which of the following is operated by a clearing house using a default fund?

A

Mutual guarantee

38
Q

Which type of margin is used by a clearing house when there are sudden changes in market volatility?

A

Intra day

39
Q

What do some exchanges have in place to avoid excessive volatility in prices?

A

Price limits

40
Q

What best describes a mutual offset system?

A

A trade on one exchange can be offset on another

41
Q

If a member of a clearing house operating an independent guarantee defaults on payment of their obligations, which of the following is true?

A

The clearing house will use any funds of the defaulting member to pay the default amount, then cover the difference itself before making a claim on the member firm

42
Q

What are the daily movements paid on a futures position on an exchange called?

A

Variation margin

43
Q

Variation margin can be described as:

A

Unrealised profits and losses

44
Q

A client provides initial margin to their broker of £10,000 and the customer agreement has a margin call level of £8,000. Variation margin payments reduce the balance down to £7,750. Which of the following is TRUE?

A

The client will be required to make a payment of £2,250

45
Q

At what stage does a clearing house become the central counterparty to a trade?

A

When the trade is registered

46
Q

ICE Clear Europe offers a mutual guarantee that includes default protection through the use of a default fund. How are each member’s contributions to this default fund calculated for their exchange traded contracts?

A

A proportion of the notional value of the default fund based on the average daily volume and value of trades conducted over a three month period

47
Q

A small broker is owned by a large bank. The broker has a loss-making position in a derivatives contract, which has been cleared by a central counterparty (clearing house). Initially the parent company funds the variation margin payments. The broker eventually stops being able to meet its variation margin payments.
Who DIRECTLY bears the risk of default?

A

The clearing house

48
Q

Which of the following types of margin would allow future margin payments to be deducted from initial margin?

A

Maintenance margin

49
Q

Taking into account offsetting position, as a contract approaches delivery, which of the following types of margin is triggered?

A

Spot month margin

50
Q

What is the principle reason for a firm opting out of segregated accounts managed by their clearer?

A

It allows them to net off their positions with those of the clearer, thus potentially reducing margin

51
Q

What best describes a mutual offset system?

A

A trade on one exchange can be offset on another

52
Q

Which system connects CME and SGX to allow the transfer of positions?

A

Mutual offset trading link

53
Q

In the case of a member defaulting on the delivery or payment of a contract, which of the following would the UK clearing house access after the defaulting member’s margin and the member’s contribution to the default fund?

A

Other member’s contributions to the default fund

54
Q

When a client pays initial margin on a futures trade, they would consider it:

A

Returnable after a position is closed, provided that variation margin payments are met

55
Q

What is the BEST definition of clearing?

A

Recording and matching trades and maintaining positions

56
Q

What is the name of the system that calculates margin payments of options and futures portfolios?

A

Standard portfolio analysis of risk

57
Q

If there is a short-term highly volatile market, a clearing house will most likely take which of the following actions?

A

Make intra-day margin calls

58
Q

Once a clearing house has performed novation, which of the following best describes the relationship between the parties involved?

A

The buyer and the seller each become contractually bound to the clearing house

59
Q

Which of the following is a difference between a UK clearing house’s initial margin and variation margin?

A

Cash is only acceptable for variation margin, whereas initial margin can be in other collateral

60
Q

Which of the following is true regarding initial margin, as calculated by SPAN, for bear spreads?

A

It is reduced due to capped profits and losses

61
Q

Which system is used by ICE Clear Europe to calculate initial margin on an interest rate futures contract?

A

SPAN

62
Q

What adjustment is made to the calculated SPAN scanning risk to adjust for offsetting futures positions?

A

Inter-commodity spread margin

63
Q

For which of the following transactions will initial margin always be paid?

A

Buying futures
Short-options position
Selling futures

64
Q

The Singapore Exchange (SGX) has pioneered a mutual offset system (MOS) for Japanese Government bond (JGB) futures since 1984 with which other exchange?

A

Chicago Mercantile Exchange (CME)

65
Q

Which of the following will a broker normally do if a client has used up their credit line?

A

Call additional collateral from the client

66
Q

Which of the following is a major role provided by ICE Clear Europe?

A

They guarantee the performance of contracts

67
Q

Which of the following could a UK clearing house accept from a clearing member as collateral?

A

Spanish government bonds

68
Q

Spot month margin is best described as?

A

Additional initial margin in the delivery month

69
Q

The process of substituting a new contract for an old contract or a new counterparty for the original counterparty is known as:

A

Novation

70
Q

Between the clearing house and a general clearing member, which of the following are true regarding exchange options on futures?

A

Long-option positions are margined daily

Option positions are margined any time up to expiry

71
Q

Futures spread margin is lower than initial margin rates because:

A

The perceived risk of a spread is lower than a normal trade

72
Q

In the event of a default by an exchange member, which of the following is the best description of what will happen if the clearing house offers an independent guarantee?

A

The resources of the clearing house can be used to close-out the position

73
Q

What type of guarantee is offered by clearing houses that novate trades?

A

Principal to principal

74
Q

A clearing member is concerned about being exposed to credit risk from their clients activities, as a result will use a position limit. Which of the follow combinations of trades is MOST likely incur a position limit?

A

Short call, long put on same underlying

75
Q

Which types of transaction may an exchange member deduct margin payments from its house account?

A

Principal and client trades

76
Q

What adjustment is made to the calculated SPAN scanning risk to adjust for offsetting futures positions?

A

Inter-commodity spread margin

77
Q

A ‘give-up’ occurs when:

A

A non-clearing member of the exchange allocates a trade to a general clearing member in order for the trade to be novated through ICE Clear Europe

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