Description Instructions Responses 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 Default Waterfall 1 Defaulter's Initial Margin (IM) 2 Defaulter's Guaranty Fund (GF) 3 CCP's own contribution (skin-in-the-game) 4 Non-defaulting clearing members' guaranty fund 5 Assessments on non-defaulting clearing members Swap-It contributes $50MM as its own contribution, or skin in the game. On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C Initial Margin Guaranty Fund $200MM $75MM $150MM $100MM $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. Using the default waterfall table above, answer the following questions 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 Description Instructions Responses 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 Default Waterfall 1 Defaulter's Initial Margin (IM) 2 Defaulter's Guaranty Fund (GF) 3 CCP's own contribution (skin-in-the-game) 4 Non-defaulting clearing members' guaranty fund 5 Assessments on non-defaulting clearing members Swap-It contributes $50MM as its own contribution, or skin in the game. On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C Initial Margin Guaranty Fund $200MM $75MM $150MM $100MM $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. Using the default waterfall table above, answer the following questions 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
