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Close-out netting: Difference between revisions
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''Be careful to distinguish between '''[[Settlement netting]]''' (also known as '''[[Payment netting]]''') - which is an operational convenience gladly applied during the life of a derivatives trading relationship, and [[Close-out netting]] which is applied, with a heavy heart, by a non-defaulting party under Section {{isdaprov|6}} of the {{isdama}} when things have turned to custard.'' | {{a|glossary|}}''Be careful to distinguish between '''[[Settlement netting]]''' (also known as '''[[Payment netting]]''') - which is an operational convenience gladly applied during the life of a derivatives trading relationship, and [[Close-out netting]] which is applied, with a heavy heart, by a non-defaulting party under Section {{isdaprov|6}} of the {{isdama}} when things have turned to custard.'' | ||
''See — for a grossly cynical view — the [[Red Flag Act]]'' | |||
=== Introduction === | === Introduction === | ||
[[Close-out netting]] is the process of doing that under a [[master agreement]] such as the {{isdama}} when one party defaults. Because an {{isdama}} may have many {{isdaprov|Transaction}}s under it, some with positive and some with negative [[mark-to-market]] exposures, the ability to “net down” all these exposures to a single net sum is important when calculating risk weighting. | [[Close-out netting]] is the process of doing that under a [[master agreement]] such as the {{isdama}} when one party defaults. Because an {{isdama}} may have many {{isdaprov|Transaction}}s under it, some with positive and some with negative [[mark-to-market]] exposures, the ability to “net down” all these exposures to a single net sum is important when calculating risk weighting. | ||
In order to achieve that | In order to achieve that “net” treatment under relevant regulations — there are a lot of them; locally, regionally, and under the [[Basel Accords|Basel banking accords]] etc — one must have [[legal opinion|legal opinions]] from all relevant jurisdictions that the “[[close out netting]]” would be effective in the [[insolvency]] of the counterparty. | ||
{{set-off and netting}} | {{set-off and netting}} | ||
{{assignment and set off}} | {{assignment and set off}} | ||
{{netting between english entities}} | |||
For a discussion of what | For a discussion of what “closing out” is and how it works in various types of Master Agreement, see: | ||
*{{isdaprov|Early Termination}} under the {{isdama}} | *{{isdaprov|Early Termination}} under the {{isdama}} | ||
*[[GMSLA Netting]] under the {{gmsla}} | *[[GMSLA Netting]] under the {{gmsla}} | ||
{{ | {{sa}} | ||
*[[Automatic early termination]] | |||
*{{Isdaprov|Close-out Amount}} | |||
{{ref}} | {{ref}} | ||