Skip to content

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

A risk manager reviews a counterparty whose netting agreement is governed by a jurisdiction where no legal opinion confirms enforceability of close-out netting in insolvency. How should exposure be treated for risk measurement purposes under prudent practice?

Exposure should be measured gross, summing positive-value trades, because netting benefits are only recognised where close-out netting is legally enforceable in insolvency, normally confirmed by a legal opinion. A signed agreement alone does not protect the bank against cherry-picking by a liquidator.

  1. AMeasure exposure on a gross basis, summing positive-value trades, for that counterpartyCorrect
  2. BApply netting anyway since the contract is signed by both parties
  3. CNet only trades of the same product type
  4. DTreat exposure as zero until the counterparty defaults

Explanation

Netting benefit depends on legal enforceability in insolvency, usually supported by a legal opinion. Without it, the liquidator may cherry-pick, so exposure should be computed without netting recognition. A signed contract alone does not guarantee enforceability.

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