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

A risk manager is assessing the residual risk on a collateralised portfolio. The counterparty fails to post collateral on day 0 after a margin call, and the bank closes out after a margin period of risk (MPOR) of 10 business days. Which statement best describes the exposure the bank still bears despite daily margining?

The bank still bears the portfolio's value change over the margin period of risk, plus thresholds, minimum transfer amounts and collateral haircuts. Daily margining shrinks exposure but leaves a gap between the last collateral exchange and close-out, so exposure is not zero.

  1. AThe change in portfolio value over the MPOR, plus thresholds and minimum transfer amounts, as well as any collateral haircutsCorrect
  2. BZero exposure, because daily margining eliminates credit risk entirely
  3. COnly the current mark-to-market value before any margin call
  4. DThe notional amount of the portfolio less collateral held

Explanation

Residual exposure arises because the portfolio value can move during the MPOR between the last successful margin exchange and close-out. Thresholds, MTAs and collateral haircuts add to this gap. Daily margining reduces but does not eliminate exposure, and notional is not the relevant measure.

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