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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A dealer has several FX trades with one counterparty all settling on the same value date in USD. Gross USD payable is 240 million and gross USD receivable is 210 million. The trades are covered by a legally enforceable payment netting agreement. How does payment netting change the dealer's settlement exposure on this value date in USD?

With enforceable payment netting, the same-day USD flows offset to a single net payment of 30 million, being 240 million payable less 210 million receivable. The dealer's settlement amount at risk falls from the gross figures to that net amount in that currency.

  1. AReduces the amount at risk to a net payment of 30 millionCorrect
  2. BReduces the amount at risk to a net payment of 450 million
  3. CLeaves the amount at risk at 240 million
  4. DReduces the amount at risk to 210 million

Explanation

Netting offsets same-day, same-currency flows: 240 payable minus 210 receivable gives a net payment of 30 million. 450 adds the flows instead of offsetting them. 240 and 210 ignore netting by taking only one leg.

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