Question 1: Total credit loss faced by Swap-It as a result of Member A’s default was $300MM. Please indicate how Swap-It will allocate the losses across different categories of the Waterfall?

Default Waterfall	$ MM
Defaulter’s Initial Margin (IM)
Defaulter’s Guaranty Fund (GF)
CCP’s own contribution (skin-in-the-game)
Non-defaulting clearing members’ guaranty fund
Assessments on non-defaulting clearing members

Question 2: Total credit loss faced by Swap-It as a result of Member A’s failure was $450MM instead. Please calculate the portion of loss, which will be assigned to non-defaulting members’ guaranty fund.

Transcribed Image Text:

Swap-It is a Derivatives Clearinghouse which clears Credit Derivatives for its members. It has 3 members - A,B &C. Member A is a domestic broker-dealer with aggressive trading strategies; Member B is a large regulated bank that aims to maintain a flat book of trades, with limited risk; Member C is a securities subsidiary of an international Bank, which trades opportunistically. Swap-It will apply the following Default Waterfall, per its rulebook. Priority 1 Default Waterfall Defaulter's Initial Margin (IM) Defaulter's Guaranty Fund (GF) CCP's own contribution (skin-in-the-game) Non-defaulting clearing members' guaranty fund Assessments on non-defaulting clearing members Swap-It contributes $50MM as its own contribution, or skin in the game. 12345 On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C $200MM $75MM $150MM $100MM Initial Margin Guaranty Fund $50MM $60MM Member A faces a large margin call from Swap-It as it had sold credit protection on numerous financial institutions, believing that markets were too worried about the financial sector, and credit spreads would tighten. However, Lehman's failure led to further widening of the credit spreads and Swap-It demanded additional margin, which Member A was unable to meet, and therefore defaulted. Swap-It is a Derivatives Clearinghouse which clears Credit Derivatives for its members. It has 3 members - A,B &C. Member A is a domestic broker-dealer with aggressive trading strategies; Member B is a large regulated bank that aims to maintain a flat book of trades, with limited risk; Member C is a securities subsidiary of an international Bank, which trades opportunistically. Swap-It will apply the following Default Waterfall, per its rulebook. Priority 1 Default Waterfall Defaulter's Initial Margin (IM) Defaulter's Guaranty Fund (GF) CCP's own contribution (skin-in-the-game) Non-defaulting clearing members' guaranty fund Assessments on non-defaulting clearing members Swap-It contributes $50MM as its own contribution, or skin in the game. 12345 On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C $200MM $75MM $150MM $100MM Initial Margin Guaranty Fund $50MM $60MM Member A faces a large margin call from Swap-It as it had sold credit protection on numerous financial institutions, believing that markets were too worried about the financial sector, and credit spreads would tighten. However, Lehman's failure led to further widening of the credit spreads and Swap-It demanded additional margin, which Member A was unable to meet, and therefore defaulted.

Answer rating: 100% (QA)

SOLUTION To allocate the losses across different categories of the waterfall in the event of Member ... View the full answer