CDP Documentation & Clearing Infrastructure 3

Question 1

A Central Counterparty (CCP) reduces systemic counterparty risk in derivatives markets primarily by:

Accepted Answer

Interposing itself as buyer to every seller and seller to every buyer via novation

Answer

Eliminating all market risk from outstanding derivative positions

Answer

Setting maximum notional limits on permissible derivatives contracts

Answer

Requiring all derivatives to be listed on a regulated exchange

Question 2

In the correct order of a CCP's 'default waterfall,' which resources are used first when a clearing member defaults?

Accepted Answer

The defaulting member's initial margin and default fund contribution

Answer

Mutualized default fund contributions of all surviving members

Answer

The CCP's own equity capital ('skin in the game')

Answer

Assessment rights levied on surviving clearing members

Question 3

'T+1' settlement in derivatives markets refers to:

Accepted Answer

Settlement occurring one business day after the trade date

Answer

Settlement occurring one calendar month after contract expiry

Answer

A one-business-day grace period after a margin call is issued

Answer

A one-day delay in trade reporting to the relevant authority

Question 4

'Delivery versus Payment' (DvP) in derivatives settlement is designed to eliminate:

Accepted Answer

Principal risk by ensuring asset delivery and cash payment occur simultaneously

Answer

Market risk by locking in prices at the time of trade execution

Answer

Liquidity risk by extending the settlement period for large trades

Answer

Operational risk by automating the confirmation matching process

Question 5

In exchange-traded derivatives markets, 'open interest' represents:

Accepted Answer

The total number of outstanding contracts not yet settled, closed, or expired

Answer

The total trading volume recorded during the current session

Answer

The number of contracts available for trading in the order book

Answer

The implied interest rate embedded in the futures contract price

Question 6

For a physically settled commodity futures contract, 'final settlement' involves:

Accepted Answer

Actual delivery of the underlying commodity in exchange for the contract price

Answer

A cash payment equal to the difference between the futures and spot price

Answer

Automatic rollover of the position into the next contract expiry

Answer

Return of the initial margin deposit to all contract holders

Question 7

Portfolio 'compression' of OTC derivatives (e.g., via TriOptima or LCH SwapClear) achieves which primary goal?

Accepted Answer

Reduces gross notional outstanding and trade count without changing net risk exposure

Answer

Converts bilateral OTC swaps into standardized exchange-listed futures

Answer

Increases leverage in the surviving portfolio by eliminating hedges

Answer

Transfers residual risk between asset classes to improve diversification