Central Clearing (FRM Part 2 - Book 2 - Credit Risk Measurement and Management - Ch 18)

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After completing this reading, you should be able to:
- Define a central counterparty (CCP) and describe the mechanics of central clearing.
- Explain the concept of novation under central clearing.
- Define netting, multilateral offset, and compression and provide examples of each.
- Describe the application and estimation of margin and default funds under central clearing.
- Discuss the risks faced by a CCP and the ways it manages its exposures.
- Provide examples of a loss waterfall.
- Explain the different methods of managing the default of one or more members of a CCP.
- Compare bilateral and central clearing.
- Compare initial margin and default fund requirements for clearing members in relation to loss coverage, cost of clearing, and moral hazard.
- Describe the advantages and disadvantages of central clearing.