CMFAS M9A Structured ILPs question: retail structured ILP sub-fund enters an over-the-counter (OTC) derivative directly

CMFAS M9AStructured ILPs

A retail structured ILP sub-fund enters an over-the-counter (OTC) derivative directly with a financial institution instead of through an exchange clearing house. Under the CIS Code, what counterparty-exposure treatment applies?

A There is no limit at all, because the counterparty is a financial institution
B Counterparty risk is taken as zero, just as it would be for an exchange-cleared trade
C Exposure is capped — generally 10% of NAV, cut to 5% for a lower-rated counterparty
D The exposure is capped at 35% of NAV

Show the answer and explanation

Answer: C. Exposure is capped — generally 10% of NAV, cut to 5% for a lower-rated counterparty

Unlike exchange-traded derivatives cleared through a central counterparty (where counterparty risk is taken as zero), OTC derivatives transacted directly with a financial institution carry a counterparty-exposure limit — generally 10% of NAV, cut to 5% for a lower-rated counterparty.

Common mistake

The zero-risk treatment applies only to exchange/central clearing; direct OTC exposure is limited (10%/5%).

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CMFAS M9A Structured ILPs question: retail structured ILP sub-fund enters an over-the-counter (OTC) derivative directly

Answer: C. Exposure is capped — generally 10% of NAV, cut to 5% for a lower-rated counterparty

Common mistake

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CMFAS M9A Structured ILPs question: retail structured ILP sub-fund enters an over-the-counter (OTC) derivative directly

Answer: C. Exposure is capped — generally 10% of NAV, cut to 5% for a lower-rated counterparty

Common mistake

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