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:(a) Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations. | :(a) Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations. | ||
:(b) Banks may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation. | :(b) Banks may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation. | ||
:(c) In both cases (a) and (b), a bank will need to satisfy its national supervisor that it has: | :(c) In both cases (a) and (b), a bank will need to satisfy its national supervisor that it has: | ||
::(1) a netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances; | ::(1) a netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances; | ||
::(2) written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank's exposure to be such a net amount under: | ::(2) written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank's exposure to be such a net amount under: | ||
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::(3) procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law. | ::(3) procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law. | ||
Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating capital requirements pursuant to this Accord. A walkaway clause is a provision which permits a non-defaulting counterparty to make only limited payments, or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.<ref>Basel Capital Accord: ''Treatment of potential exposure for off-balance-sheet items'', April 1995, https://www.bis.org/publ/bcbs18.pdf}}}}The sacred prehistory of “the one agreement to rule them all” — the [[Single Agreement]]; known these days as the {{isdama}} — predates even the [[First Men]] and, yea, even before them, to the black dawn of prehistory when free cash flows were first discovered in the wild and artificially set against each other for pleasing effect by the [[Children of the Forest]]. Swaps were even mentioned in passing in the Old Testament: | Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating capital requirements pursuant to this Accord. A walkaway clause is a provision which permits a non-defaulting counterparty to make only limited payments, or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.<ref>Basel Capital Accord: ''Treatment of potential exposure for off-balance-sheet items'', April 1995, https://www.bis.org/publ/bcbs18.pdf</ref>}}}}The sacred prehistory of “the one agreement to rule them all” — the [[Single Agreement]]; known these days as the {{isdama}} — predates even the [[First Men]] and, yea, even before them, to the black dawn of prehistory when free cash flows were first discovered in the wild and artificially set against each other for pleasing effect by the [[Children of the Forest]]. Swaps were even mentioned in passing in the Old Testament: | ||
{{quote|''But if he be [[out of the money|poorer than thy estimation]], then he shall present himself before the [[calculation agent]], and the [[calculation agent]] shall [[Valuation|value]] him; And if it be a [[physical settlement]], whereof men bring an offering unto the LORD, all that any man giveth of such unto the LORD shall be holy. And if he shall at all [[swap]] [[cashflow]] for [[asset]], yea, or [[asset]] for [[cashflow]], then the [[exchange]] thereof shall be holy.'' | {{quote|''But if he be [[out of the money|poorer than thy estimation]], then he shall present himself before the [[calculation agent]], and the [[calculation agent]] shall [[Valuation|value]] him; And if it be a [[physical settlement]], whereof men bring an offering unto the LORD, all that any man giveth of such unto the LORD shall be holy. And if he shall at all [[swap]] [[cashflow]] for [[asset]], yea, or [[asset]] for [[cashflow]], then the [[exchange]] thereof shall be holy.'' | ||
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It turned out there was. It is called “[[netting]]”, but it is a complicated legal mechanism<ref>Well, it was in 1981, like.</ref>, especially in the insolvency of your counterparty. All kinds of local insolvency rules might interfere with your right to “net” these strange, exotic contracts called “[[Sw-æp]]s”. | It turned out there was. It is called “[[netting]]”, but it is a complicated legal mechanism<ref>Well, it was in 1981, like.</ref>, especially in the insolvency of your counterparty. All kinds of local insolvency rules might interfere with your right to “net” these strange, exotic contracts called “[[Sw-æp]]s”. | ||
So, the [[Bank of International Settlements]] hastily made up some rules to make sure banks were diligently applying netting treatment. They thought about doing this in the Basel I capital accord in 1988 and got cold feet. Their feet had warmed up sufficiently by 1995 for the committee to provide | So, the [[Bank of International Settlements]] hastily made up some rules to make sure banks were diligently applying netting treatment. They thought about doing this in the Basel I capital accord in 1988 and got cold feet. Their feet had warmed up sufficiently by 1995 for the committee to provide as it set out in the panel to the right. | ||
In other words, you must have a [[legal opinion]] assuring you that netting would work in insolvency in all relevant jurisdictions. This seemed harmless enough in 1995 — even prudent — rather like it seemed harmless in 1865 to [[Locomotive Act|require someone to walk in front of those new-fangled “automobiles” waving a red flag to warn unsuspecting passers by]]. And that day a cottage industry was born which, to this day, employs literally tens of thousands of people and wastes hundreds of millions of pounds in compliance each year. | |||
{{sa}} | {{sa}} | ||