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. Default Waterfall Priority 1 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. On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C $50MM Initial Margin Guaranty Fund $200MM $75MM $150MM $100MM $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. 12345 Question 2: Total credit loss faced by Swap-It as a result of Member A's failure was $400MM. Please calculate the portion of loss, which will be assigned to non-defaulting members' guaranty fund. Question 3: If Member A fails, what is the maximum credit loss that Swap-It can withstand before making an Assessment on non-defaulting members? Question 4: If credit losses total $900MM as a result of failure of A, what is the value of assessment the non-defaulting members would face? Question 5: By becoming a member of this derivatives clearinghouse, what is the unique risk a member is taking, which is beyond its control? 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. Default Waterfall Priority 1 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. On September 15th, 2008, the IM and GF contributions of the members are as below: Member A Member B Member C $50MM Initial Margin Guaranty Fund $200MM $75MM $150MM $100MM $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. 12345 Question 2: Total credit loss faced by Swap-It as a result of Member A's failure was $400MM. Please calculate the portion of loss, which will be assigned to non-defaulting members' guaranty fund. Question 3: If Member A fails, what is the maximum credit loss that Swap-It can withstand before making an Assessment on non-defaulting members? Question 4: If credit losses total $900MM as a result of failure of A, what is the value of assessment the non-defaulting members would face? Question 5: By becoming a member of this derivatives clearinghouse, what is the unique risk a member is taking, which is beyond its control
