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

Which statement best describes the purpose of a legal opinion on netting enforceability for a given jurisdiction?

A netting legal opinion confirms that close-out netting would be enforceable under the relevant insolvency law, including the counterparty's jurisdiction. This supports recognising netted rather than gross exposure for risk and regulatory capital purposes.

  1. AIt confirms close-out netting would be upheld in that jurisdiction's insolvency law, supporting regulatory netting recognitionCorrect
  2. BIt guarantees the counterparty will not default
  3. CIt removes the need for collateral under the agreement
  4. DIt sets the recovery rate applied to unsecured claims

Explanation

Regulators permit exposure reduction from netting only if the bank has well-founded legal opinion that netting is enforceable in relevant jurisdictions, including the counterparty's insolvency regime. The opinion does not affect default probability, collateral needs or recovery rates.

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