Template:Crmtechniques: Difference between revisions
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===An Important point === | ===An Important point === | ||
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'' | 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 will leave the bank with an exposure for the return of any [[excess collateral]] or [[haircut]]; however | |||
*transfer under 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 leave the bank with no counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it is the bank’s, and if the counterparty goes [[bust]], the bank will be entitled to have it returned in full. | |||
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Revision as of 10:06, 29 August 2017
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.
An Important point
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 will leave the bank with an exposure for the return of any excess collateral or haircut; however
- transfer under a pledged collateral arrangement — at least to the exent that the bank doesn’t surrender legal title[3] to the collateral at all — will leave the bank with no counterparty credit exposure at all to the haircut or excess, seeing as it is the bank’s, and if the counterparty goes bust, the bank will be entitled to have it returned in full.
- ↑ 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.