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

Under an ISDA Master Agreement with close-out netting, Bank A has four trades with Counterparty B at the early termination date, with mark-to-market values to A of +30 million, +20 million, -35 million and -5 million (USD). No collateral is held and A is the non-defaulting party. Ignoring close-out costs, what is the amount owed and by whom?

The net close-out amount is USD 10 million payable by Counterparty B to Bank A, because 30 plus 20 minus 35 minus 5 equals plus 10. Netting offsets the negative-value trades against the positive ones, reducing exposure from 50 million gross.

  1. AB owes A USD 50 million
  2. BB owes A USD 10 millionCorrect
  3. CA owes B USD 10 million
  4. DA owes B USD 40 million

Explanation

Net = 30 + 20 - 35 - 5 = +10 million in favour of A, so B owes A USD 10 million. Gross positive exposure of 50 million would apply only if netting were unenforceable and A had to pay its own negative trades in full.

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