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

A bank trades several OTC derivatives with a corporate counterparty under a single ISDA Master Agreement. The legal opinion confirms that close-out netting is enforceable in the counterparty's jurisdiction. Which statement best describes the main effect of the 'single agreement' concept in the ISDA Master Agreement?

The single agreement concept treats all transactions under the ISDA Master Agreement as one contract. On default they can be closed out and netted into one amount, which prevents a liquidator from cherry-picking profitable trades and rejecting unprofitable ones.

  1. AAll transactions form one single agreement, so on default the bank can net them into one termination amount rather than cherry-pickCorrect
  2. BEach transaction remains a separate contract, so the defaulting party's liquidator may enforce only the profitable ones
  3. CThe agreement eliminates the need for any collateral to be posted between the parties
  4. DThe agreement fixes the same payment currency and the same valuation date for all trades at inception

Explanation

The single agreement concept treats the Schedule, confirmations and all transactions as one contract. This supports close-out netting into a single net amount and prevents a liquidator from cherry-picking profitable trades. The separate-contract option describes the risk netting is designed to remove.

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