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

A dealer bank trades OTC derivatives with a hedge fund under a single ISDA Master Agreement. The hedge fund defaults. Which feature of the ISDA Master Agreement most directly allows the bank to calculate one net amount owed across all its trades with the fund?

The single agreement concept lets the bank treat all transactions under the ISDA Master as one contract. On default they are terminated and valued together into one net payment, which is the basis of close-out netting. Collateral terms and confirmations do not deliver this netting.

  1. AThe single agreement concept, under which all transactions form one contract for close-out nettingCorrect
  2. BThe credit support annex, which sets the independent amount
  3. CThe confirmation for each trade, which fixes the payment dates
  4. DThe schedule's cross-default threshold

Explanation

The ISDA Master Agreement treats all transactions under it as part of a single agreement. On an event of default, they are terminated and valued together into one net sum. The credit support annex governs collateral, not the netting of exposures, and confirmations only document individual trades.

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