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

Under a netting agreement enforceable in the relevant jurisdiction, Bank A has three terminated trades with a defaulting counterparty. The close-out values to Bank A are +USD 12 million, +USD 7 million and -USD 15 million. No collateral is held. What is Bank A's net claim on the defaulted counterparty?

The net claim is USD 4 million. With enforceable close-out netting, the three values are summed: 12 plus 7 minus 15 equals 4. Using only the positive trades would give USD 19 million, which wrongly ignores the amount Bank A owes on the negative trade.

  1. AUSD 19 million
  2. BUSD 4 millionCorrect
  3. CUSD 34 million
  4. DUSD 7 million

Explanation

Net = 12 + 7 - 15 = 4 million. Bank A has a USD 4 million claim. USD 19 million ignores the negative trade (no netting). USD 34 million adds absolute values (wrong sign on the negative trade).

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