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P1.T3.603. Basic principles of central clearing (Gregory)

Nicole Seaman

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Learning objectives: Provide examples of the mechanics of a central counterparty (CCP). Describe advantages and disadvantages of central clearing of OTC derivatives.

Questions:

603.1. Which is TRUE of clearing?

a. By definition, clearing is central
b. Clearing occurs between execution and settlement
c. Clearing refers to the exchange of securities and/or cash and fulfillment of legal obligations
d. On most exchanges, clearing is an intraday dynamic with an occasional maximum time horizon of several days


603.2. Novation, which is critical to central clearing, is the legal process whereby the central counterparty (CCP) positions itself between the buyer and seller by replacing a contract with one or more other contracts. After novation, which risk(s) does the CCP bear?

a. Market risk
b. Conditional market risk
c. Novation implies that the CCP inherits only market risk
d. Novation ensures that the CCP is immunized from credit and market risk


603.3. According to Gregory, which of the following is a potential DISADVANTAGE of a central counterparty (CCP)?

a. Bifurcations
b. Market liquidity
c. Loss mutualization
d. Default management

Answers here:
 
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