The termination and valuation of all trades with a defaulting party. The net amount due is then settled.
Where you will meet it
Close-out comes up in 22 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Close-out netting, the form that matters for credit risk, works under a master agreement such as the ISDA Master Agreement.”
Credit Risk Transfer Mechanisms FRM Part I · Foundations of risk management
“Close-out netting combines positive and negative values under one enforceable master agreement into a single net claim.”
Measuring Credit Risk FRM Part I · Valuation and risk models
“Netting agreements, collateral and close-out terms change exposure and must be modelled by netting set.”
Credit Risk Management FRM Part II · Credit risk measurement and management
“The bank also reduces credit risk through diversification, limits, collateral and guarantees, covenants, close-out netting and margining on derivatives, credit default swaps, syndication or loan sales, securitisation, risk-based pricing and early monitoring.”
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