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FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Dealer D has two netting sets with Counterparty C. Set 1 has net value +USD 30 million to D; Set 2 has net value -USD 20 million to D. Set 1 is covered by an enforceable netting agreement, but Set 2 is under a separate agreement and the two sets cannot be netted against each other. D holds USD 10 million of collateral against Set 1 only. If C defaults and recoveries on uncollateralized claims are zero, what is D's loss?

D's loss is USD 20 million. Set 1's USD 30 million claim is reduced by USD 10 million of collateral, and because the sets cannot be netted together, Set 2's USD 20 million liability gives no offset against the loss.

  1. AUSD 20 millionCorrect
  2. BUSD 10 million
  3. CUSD 30 million
  4. DUSD 0

Explanation

Set 1 exposure net of collateral is 30 - 10 = USD 20 million. Set 2 is a liability of D and cannot offset Set 1, so the USD 20 million is not reduced. Loss is USD 20 million. USD 10 million wrongly nets the sets (30-20); USD 30 million ignores collateral.

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