CDP Documentation & Clearing Infrastructure 2

Question 1

The Credit Support Annex (CSA) primarily governs which aspect of an OTC derivatives relationship?

Accepted Answer

The posting and return of collateral to mitigate credit exposure

Answer

The CSA establishes the terms under which counterparties exchange collateral (margin) to reduce the credit exposure arising from mark-to-market fluctuations in OTC derivatives portfolios.

Question 2

In a CSA, the 'Independent Amount' is functionally equivalent to:

Accepted Answer

Initial margin covering potential future exposure

Answer

The Independent Amount is posted upfront to cover potential future exposure, similar to initial margin, and does not fluctuate with daily mark-to-market changes.

Question 3

'Variation Margin' under a CSA is exchanged to cover:

Accepted Answer

Changes in the current mark-to-market value of the derivatives portfolio

Answer

Variation margin is transferred daily to cover current mark-to-market losses, ensuring that credit exposure is continuously reduced to near zero.

Question 4

A 'Threshold' in a CSA represents:

Accepted Answer

The exposure level below which no collateral transfer is required

Answer

The Threshold functions as an unsecured credit limit; collateral is only required when exposure to the counterparty exceeds this agreed level.

Question 5

Under the BCBS-IOSCO margin requirements for uncleared OTC derivatives, which counterparties are mandated to exchange both initial margin and variation margin?

Accepted Answer

Financial entities above specified aggregate notional thresholds

Answer

BCBS-IOSCO rules phase in requirements based on a firm's aggregate average notional (AANA), mandating both IM and VM exchange for financial counterparties above specific thresholds.

CDP - Certified Derivatives Professional Practice Test

CDP - Certified Derivatives Professional Practice Test

CDP Documentation & Clearing Infrastructure 2