Template:Crmtechniques: Difference between revisions
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[[CRM technique]]s under the [[Standardised Approach to Credit Risk|Basel]] [https://www.bis.org/publ/bcbsca04.pfd Standardised Approach to Credit Risk] framework are broken down as follows: | [[CRM technique]]s under the [[Standardised Approach to Credit Risk|Basel]] [https://www.bis.org/publ/bcbsca04.pfd Standardised Approach to Credit Risk] framework are broken down as follows: | ||
*'''[[Title transfer collateral arrangement|Collateralised transactions]]''': A bank has a [[credit exposure]] which it hedges<ref>This is what it says, and I suppose it is true, even though | *'''[[Title transfer collateral arrangement|Collateralised transactions]]''': A bank has a [[credit exposure]] which it [[hedges]]<ref>This is what it says, and I suppose it is true, even though “[[hedging]]” is a curious way of describing it.</ref> [[in whole or in part]] by {{csaprov|collateral}} posted by a counterparty or a [[credit support provider]]. (Often there is no more than a fag paper between a [[TTCA]] and an on-balance sheet [[netting]] arrangement)<ref>In many cases (e.g. the {{isdama}} a collateral arrangement will be delivered under a “{{isdaprov|transaction}}”, and so will explicitly be a [[master netting agreement|master netting arrangement]].</ref>. | ||
*'''On-[[balance sheet]] {{tag|netting}}''': Legally enforceable [[close-out netting]] arrangements covering multiple transactions with offsetting [[mark-to-market]] values. | *'''On-[[balance sheet]] {{tag|netting}}''': Legally enforceable [[close-out netting]] arrangements covering multiple transactions with offsetting [[mark-to-market]] values. | ||
*'''{{tag|Guarantee}}s and [[credit derivative]]s''': {{tag| | *'''{{tag|Guarantee}}s and [[credit derivative]]s''': {{tag|Guarantee}}s provided by third parties (whose [[credit risk]] isn't materially correlated to the counterparty’s) or {{tag|credit derivative}} transactions. | ||
Now note a fundamental difference between legally enforceable {{tag|netting}} arrangements and [[Guarantees]]: In a netting arrangement the full value of the offsetting transaction fully and automatically cancels out the corresponding [[exposure]]. There are no contingencies. By contrast, collateral arrangements that don’t amount to enforceable [[netting]] arrangements, [[guarantees]] and [[CDS]] transactions ''all depend for their effectiveness on the solvency of the person providing the credit mitigation'' – if the credit support provider fails, so does the credit mitigation and the exposure remains. | Now note a fundamental difference between legally enforceable {{tag|netting}} arrangements and [[Guarantees]]: In a netting arrangement the full value of the offsetting transaction fully and automatically cancels out the corresponding [[exposure]]. There are no contingencies. By contrast, collateral arrangements that don’t amount to enforceable [[netting]] arrangements, [[guarantees]] and [[CDS]] transactions ''all depend for their effectiveness on the solvency of the person providing the credit mitigation'' – if the credit support provider fails, so does the credit mitigation and the exposure remains. | ||
===Credit risk ''mitigation'' against exposure ''negation'' === | |||
Note the difference between [[CRM technique|techniques]] which mitigate a credit risk that you nonetheless have — as above — and those which negate the [[credit exposure]] in the first place. | |||
So, ''par example'': | |||
*A [[title-transfer collateral arrangement]] whereby a bank transfers {{tag|collateral}} to a counterparty outright may, as part of a valid [[netting]] agreement, mitigate that collateral but it will leave an exposure for the return of any [[excess collateral]] should the MTM move (or any margin [[haircut]]); however | |||
*A [[pledged collateral arrangement]] — at least [[to the exent]] that the bank doesn’t surrender legal title<ref>Do not get me started on [[rehypothecation]].</ref> to the collateral at all — will<ref>Assuming you get the legals right...</ref> leave the bank with ''no'' counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it remains the bank’s, and if the counterparty goes [[bust]], the bank does not have to claim it from the counterparty’s insolvent estate. | |||
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Latest revision as of 08:29, 18 June 2019
CRM techniques under the Basel Standardised Approach to Credit Risk framework are broken down as follows:
- Collateralised transactions: A bank has a credit exposure which it hedges[1] in whole or in part by collateral posted by a counterparty or a credit support provider. (Often there is no more than a fag paper between a TTCA and an on-balance sheet netting arrangement)[2].
- On-balance sheet netting: Legally enforceable close-out netting arrangements covering multiple transactions with offsetting mark-to-market values.
- Guarantees and credit derivatives: Guarantees provided by third parties (whose credit risk isn't materially correlated to the counterparty’s) or credit derivative transactions.
Now note a fundamental difference between legally enforceable netting arrangements and Guarantees: In a netting arrangement the full value of the offsetting transaction fully and automatically cancels out the corresponding exposure. There are no contingencies. By contrast, collateral arrangements that don’t amount to enforceable netting arrangements, guarantees and CDS transactions all depend for their effectiveness on the solvency of the person providing the credit mitigation – if the credit support provider fails, so does the credit mitigation and the exposure remains.
Credit risk mitigation against exposure negation
Note the difference between techniques which mitigate a credit risk that you nonetheless have — as above — and those which negate the credit exposure in the first place.
So, par example:
- A title-transfer collateral arrangement whereby a bank transfers collateral to a counterparty outright may, as part of a valid netting agreement, mitigate that collateral but it will leave an exposure for the return of any excess collateral should the MTM move (or any margin haircut); however
- A pledged collateral arrangement — at least to the exent that the bank doesn’t surrender legal title[3] to the collateral at all — will[4] leave the bank with no counterparty credit exposure at all to the haircut or excess, seeing as it remains the bank’s, and if the counterparty goes bust, the bank does not have to claim it from the counterparty’s insolvent estate.
- ↑ This is what it says, and I suppose it is true, even though “hedging” is a curious way of describing it.
- ↑ In many cases (e.g. the ISDA Master Agreement a collateral arrangement will be delivered under a “transaction”, and so will explicitly be a master netting arrangement.
- ↑ Do not get me started on rehypothecation.
- ↑ Assuming you get the legals right...