Template:Capsule insolvency termination: Difference between revisions

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[[Credit officer]]s will hotly deny this, but when it comes to [[closing out]] a [[master trading agreement]] there are two main triggers: [[failure to pay]] and [[bankruptcy]]/[[insolvency]]. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you have gone [[bankrupt]] — but there are some nuances both to what counts as an insolvency, which may differ for different entity types ([[banks]] and [[insurer]]s in particular having special local administrative regimes, or [[bank recovery and resolution]] frameworks which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery pokery around the edges in defining what counts as an insolvency event. But it is not contentious stuff; just detail.
====Termination upon insolvency====
{{drop|C|redit officers will}} hotly deny this, but when it comes to [[closing out]] a [[master trading agreement]] there are two main triggers: [[failure to pay]] and [[bankruptcy]]/[[insolvency]]. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you are [[insolvent]].


Similarly, some bankruptcy regimes may impede a claimant’s normal rights under the master agreement once the game is finally up. These measures are designed to ensure an orderly resolution of the institution, protect other creditors, depositors, and investors who might hold preferred or secured claims  So the insolvent entity’s contractual obligations might be suspended. A counterparty might not be allowed to [[close out]] its open transactions. This is lovely for the folk queueing ut they introduce risk to treading counterparties who have not only credit but market risk on the line. It is not a nice feeling to have your transactions suddenly frozen while the market is gyrating like a belly-dancer, and the people who you are trading with wandering around on the pavement outside their office clutching iron mountain boxes.
Still, there are some nuances to what counts as insolvency. It may differ for different entity types: [[banks]] and [[insurer]]s, in particular, having special local administrative regimes or [[BRRD|recovery and resolution frameworks]] which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery-pokery around the edges in defining what counts as an “insolvency event”. But it is not contentious stuff; just detail.


Where these suspension rights stop you quickly closing out and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.
Where these suspension rights stop you quickly [[closing out]] and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.
 
{{insolvency}}

Latest revision as of 11:19, 12 September 2024

Termination upon insolvency

Credit officers will hotly deny this, but when it comes to closing out a master trading agreement there are two main triggers: failure to pay and bankruptcy/insolvency. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you are insolvent.

Still, there are some nuances to what counts as insolvency. It may differ for different entity types: banks and insurers, in particular, having special local administrative regimes or recovery and resolution frameworks which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery-pokery around the edges in defining what counts as an “insolvency event”. But it is not contentious stuff; just detail.

Where these suspension rights stop you quickly closing out and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.

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