Closeout risk - Meaning

23Nov, 23

Closeout risk - Meaning

The risk that closeout proceedings pose to either party, in a set of bilateral transactions and in the event of a default in one of the parties. Closeout risk can consist of a variety of factors, including market risk (e.g., the residual contract value, value of collateral), liquidity risk (e.g., the risk that bilateral contracts cannot be replaced during closeout) and correlation risk (e.g., depending on whether the residual contract is valued at replacement cost or risk-free cost, the correlation between exposure and undefaulted party can impact the contract value determined at closeout).