Skip to content

FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects

A bank has a netting set with a counterparty in a jurisdiction where netting enforceability is uncertain. Trades: +20 million and -14 million to the bank. The bank's own exposure model assumes netting applies. Which action best reflects sound practice?

The bank should treat exposure as 20 million gross, the sum of positive values, until a legal opinion supports enforceability. If cherry picking is possible, the bank owes the negative trade in full while claiming the positive trade as an unsecured creditor.

  1. AReport the net 6 million exposure since the contract is standard
  2. BReport 20 million gross exposure for the set until enforceability is supported by a legal opinionCorrect
  3. CReport 14 million as the exposure
  4. DReport zero exposure because positives and negatives offset

Explanation

Without a reliable legal basis, the liquidator could cherry pick, so the bank should treat the exposure as the sum of positive values, 20 million. Netting to 6 million is the optimistic case. 14 million is the negative leg and not an exposure.

Did you get it right without looking?

One question tells you little. A timed set on Netting, Close-out and Related Aspects shows your real accuracy, how long you take and where you lose marks.

Practise Netting, Close-out and Related AspectsFree diagnostic mock

More Netting, Close-out and Related Aspects questions