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

Through novation, a CCP becomes the buyer to every seller and seller to every buyer, mutualizing counterparty credit risk and reducing bilateral exposure across the market.

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

The default waterfall uses the defaulter's own initial margin and default fund contribution first, before touching CCP capital or surviving members' funds, to minimize mutualization of losses.

Question 3

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

Accepted Answer

Settlement occurring one business day after the trade date

Answer

T+1 means settlement completes one business day after the trade date (T), with T+2 and T+3 being common for other asset classes.

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

DvP links asset transfer and cash payment so both legs settle simultaneously, eliminating the principal risk that one party delivers without receiving payment.

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

Open interest measures the total number of active, outstanding derivative contracts that remain open and have not been offset, exercised, or expired.

CDP - Certified Derivatives Professional Practice Test

CDP - Certified Derivatives Professional Practice Test

CDP Documentation & Clearing Infrastructure 3