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

Which describes bilateral set-off differently from close-out netting?

Set-off is a general legal right to offset mutual claims between two parties, not limited to derivatives, and depends on mutuality and local insolvency law. Close-out netting is a contractual mechanism to terminate and value trades under a master agreement.

  1. ASet-off is available only to the defaulting party
  2. BSet-off applies to claims between the parties generally, not necessarily derivatives, and may depend on mutuality and local lawCorrect
  3. CSet-off always requires collateral
  4. DSet-off converts all trades into one currency before default

Explanation

Set-off is a broader legal right to offset mutual debts and may be limited by mutuality requirements and insolvency law. Close-out netting is contractual and specific to terminating and valuing transactions under an agreement. Neither requires collateral nor is exclusive to the defaulter.

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