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

In insolvency law, how does set-off differ from close-out netting as risk mitigants for a creditor?

Set-off offsets mutual debts between parties, and its availability and scope depend on local insolvency law. Close-out netting under a master agreement terminates and values all covered trades into a single net amount. They are related but not identical, and the other statements overgeneralize.

  1. ASet-off typically applies to mutual debts at insolvency and may be limited to certain claims, while close-out netting terminates and values all covered trades into one net amountCorrect
  2. BSet-off applies only before insolvency and is void afterwards in all jurisdictions
  3. CSet-off and close-out netting are identical and interchangeable in every legal system
  4. DSet-off requires the liquidator's consent in all jurisdictions, while netting does not

Explanation

Set-off offsets mutual, matured debts and its availability and scope vary by jurisdiction. Close-out netting under a master agreement first terminates and values the trades, then produces a single net sum. The other options make universal claims that are incorrect.

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