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

Bank X has two netting sets with a defaulting counterparty. Set 1 (enforceable netting) has trade values of +80, -50 and +30 (USD million). Set 2 sits in a jurisdiction where netting is not enforceable and has trades of +40 and -60. Bank X holds USD 10 million of collateral against Set 1 only. The bank owes amounts on negative trades in full to the estate. What is Bank X's total exposure after collateral, treating Set 2 trades gross?

Exposure is USD 90 million. Set 1 nets to 60 and collateral of 10 reduces it to 50. Set 2 cannot be netted, so only the positive trade of 40 counts. The sum is 90. Ignoring collateral gives 100, and netting Set 2 would understate exposure.

  1. AUSD 90 millionCorrect
  2. BUSD 100 million
  3. CUSD 80 million
  4. DUSD 70 million

Explanation

Set 1 net = 80 - 50 + 30 = 60; less collateral 10 = 50. Set 2 unenforceable netting: exposure = sum of positives = 40. Total = 50 + 40 = 90. USD 100 million ignores collateral. USD 80 million nets Set 2 as -20 would give 30 incorrectly; 70 deducts collateral twice or mis-nets.

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