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

Which feature of the close-out process most directly protects a non-defaulting party against the risk that a liquidator selectively performs favourable contracts?

A single-agreement clause treats all transactions as one contract, so on default they are terminated and netted to one amount. That prevents a liquidator from performing profitable trades and repudiating unprofitable ones.

  1. AA single-agreement clause under which all transactions form one contract, so obligations are netted into one termination amountCorrect
  2. BA longer settlement cycle for each trade
  3. CA higher initial margin on new trades only
  4. DA guarantee from the defaulter's parent covering only favourable trades

Explanation

The single-agreement concept makes all trades part of one contract, so a liquidator cannot separate and cherry pick them. Margin and settlement timing do not remove cherry-picking rights.

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