Netting manifesto
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You need opinions
To qualify for capital relief for netting and collateral arrangements built into master trading agreements, a dealer must have reasoned legal opinions that give a clear answer as to whether netting would be enforceable in each jurisdiction for each master agreement and for each counterparty type with whom it trades. Traditionally, each industry association has obtained netting opinions for its own master agreement in main jurisdictions and for main counterparty types:
- ISDA for the ISDA Master Agreement and credit support annexes
- ISLA and ICMA, in a bizarre way jointly and severally for stock lending and repo agreements
- FIA for exchange-traded derivatives
- Local banking associations (SBA, BdB, FBF, etc) for local law master agreements
But it's a disaster
- No co-ordination: The industry associations don’t co-ordinate their opinion gathering, and indeed treat the gathering opinions as some kind of secret, commercially vital operation.
- Mucho duplication: Despite tons of overlap in subject matter — whether an agreement is nettable for a given counterparty is unlikely to differ by agreement type — the industry associations instruct different firms, phrase their instructions differently, and identify and categorize counterparty types differently. B
- Arbitrary gaps: There are arbitrary caps in coverage. A significant portion of our counterparties are not covered by industry opinions and require bespoke opinions
- Incomprehensible: The opinons are long, verbose, and do not summarise of provide clear guidance, such that there are third-party services (e.g. AOSphere) designed to aid the interpretation and codification of opinions, and even these are inadequate, requiring additional internal interpretation.
Supplemental opinions: As a result UBS (and other institutions) must get additional custom opinions for entity types, jurisdictions and agreement types not covered by every industry opinion.