Template:Crmtechniques: Difference between revisions
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*'''[[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 arrangement</ref>. | *'''[[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 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. | ||
Revision as of 11:04, 29 August 2017
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Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works. {{{2}}}
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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.
References
- ↑ 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.