CMFAS M8A Leverage & Derivatives in Funds question: ISDA Master Agreement between a fund and an OTC derivatives counterparty

CMFAS M8ALeverage & Derivatives in Funds

An ISDA Master Agreement between a fund and an OTC derivatives counterparty is important because it:

A Enables close-out netting, so on default only the net amount across trades is owed
B Makes the counterparty's parent company guarantee every trade under it
C Moves the fund's OTC trades onto an exchange, where they are centrally cleared
D Removes the need for collateral, since netting eliminates all counterparty exposure

Show the answer and explanation

Answer: A. Enables close-out netting, so on default only the net amount across trades is owed

An ISDA Master Agreement documents the relationship and enables close-out netting: if a party defaults, offsetting exposures across all covered trades are netted to a single amount, sharply reducing counterparty risk.

Common mistake

Netting reduces exposure to the NET figure; the ISDA does not guarantee returns or eliminate the need for collateral.

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CMFAS M8A Leverage & Derivatives in Funds question: ISDA Master Agreement between a fund and an OTC derivatives counterparty

Answer: A. Enables close-out netting, so on default only the net amount across trades is owed

Common mistake

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CMFAS M8A Leverage & Derivatives in Funds question: ISDA Master Agreement between a fund and an OTC derivatives counterparty

Answer: A. Enables close-out netting, so on default only the net amount across trades is owed

Common mistake

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