Template:Derivatives as specified indebtedness

Derivatives as {{{{{1}}}|Specified Indebtedness}}

Be wary of including derivatives or other non-debt-like money payment obligations in the definition of {{{{{1}}}|Specified Indebtedness}}, no matter how high a {{{{{1}}}|Threshold Amount}}. We would say never do it, but the wise minds of the credit department may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it.

In its unadulterated formulation, {{{{{1}}}|Cross Default}} aggregates up all {{{{{1}}}|Transaction}}-level defaults, so even though a single ISDA Master Agreement would be unlikely to have a net out-of-the-money MTM of anywhere near the {{{{{1}}}|Threshold Amount}}, a large number of individual {{{{{1}}}|Transaction}} MTMs, if aggregated, may — particularly if you’re selective about which {{{{{1}}}|Transaction}}s you’re counting — which {{{{{1}}}|Cross Default}} entitles you to be.

Thus, where you have a large number of small failures, you can still have a big problem. (This is why banks should also carve out deposits: operational failure or regulatory action can create an immediate problem).

Now it is true that you can require the {{{{{1}}}|Specified Indebtedness}} of a master trading agreement to be calculated by reference to its net close-out amount, but this only really points up the imbalance between buy-side and sell-side. Sure, fund managers may have fifty or even a hundred ISDA Master Agreements, but they will be split across dozens of different funds., each a different entity with its own {{{{{1}}}|Threshold Amount}}. Broker-dealers, on the other hand, will have literally hundreds of thousands of master agreements, all facing the same legal entity. Credit dudes: you are the wrong side of this risk, fellas.

Now seeing as most master trading agreements are fully collateralised, and so don’t represent material indebtedness on a netted basis anyway, it may be that even with hundreds of thousands of the blighters, no-one’s {{{{{1}}}|Threshold Amount}} will ever be seriously threatened. But if no {{{{{1}}}|Threshold Amount}} is ever at risk from an ISDA Master Agreement, then why are you including the ISDA Master Agreement in {{{{{1}}}|Specified Indebtedness}} in the first place?

O tempora. O paradox.