Skip to content

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

A bank's netting agreement with a counterparty is found by legal opinion to be unenforceable in the counterparty's jurisdiction, and the counterparty defaults. The bank's trades have values of +60 million and -45 million. What is the likely consequence for the bank's loss exposure?

Exposure is effectively 60 million gross, and the bank may still have to pay the 45 million it owes. Without enforceable close-out netting, the liquidator can cherry-pick trades, so the offset to 15 million is not available.

  1. AExposure is 15 million because values are netted anyway
  2. BExposure is 60 million, while the bank may still owe 45 million to the estateCorrect
  3. CExposure is zero since the trades offset
  4. DExposure is 105 million

Explanation

Without enforceable close-out netting, a liquidator can cherry-pick: demand payment on the 45 million owed while paying only a recovery on the 60 million owed to the bank. Exposure is therefore gross at 60 million, not 15 million.

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