Netting manifesto

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The Devil’s Advocate

In which the curmudgeonly old sod puts the world to rights.

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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:

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.

Several industry associations independently carry out opinion gathering regimes at great expense on behalf of their memberships. The majority membership of all of these industry associations is common. The brokers have delegated the business of arranging for netting opinions to the industry associations and been largely passive in how it has been carried out. This has benefited the associations themselves, and the global law firms, but not the brokers. All of these brokers are paying for effectively the same service six or seven times, and then incurring further cost to understand what they have paid for, because those seven exercises are not done very well.

The industry needs clear, binary netting signals, itemised for standard counterparty types, rendered consistently across agreement formats, ideally in a machine-readable form.

  • Necessary reasoned legal analysis can be annexed in support to meet regulatory standards, but the main operational requirement is for unambiguous data.
  • Both the process and its output are unsatisfactory to meet the industry need:
    • Opinion format is unsatisfactory: The opinion format does not meet its required purpose. Opinions are too long, are poorly summarised (if at all), often require their own nuanced legal interpretation, and do not always provide clear yes/no answers.
    • Second-order costs: most brokers employ second-order services to analyse and summarise opinions, and even then the output is not clear.


Brokers should collaborate to jointly instruct their industry associations to collaborate on a single universal opinion for each jurisdiction covering all industry agreements, all major counterparty types, and providing clear yes/no answers for each material legal issue for each counterparty type for each agreement.

Most regulated broker-dealers are members of all the main industry associations and wield significant influence in all of them. Form a consortium of broker-dealers to present the following requirements to all the industry associations jointly:

  • The industry associations must co-ordinate among themselves to obtain a single opinion for each jurisdiction, addressed jointly to all of them, addressing the netting arrangements under all industry master agreements.
  • Each single opinion should adopt a common counterparty taxonomy (we suggest the one developed by ISDA) and must address all legal entity types identified by any of the industry associations for that jurisdiction.
  • The opinion must state categorically for each counterparty type whether the netting and closeout arrangements under each master agreement would satisfy the Basel requirements. This must be a binary indication: if the answer is not yes, it must be “no”.
  • The opinions may not “recommend” provisions or language for master agreements unless that language is mandatory in order to achieve the netting conclusion, and it would be negative without it.
  • The opinion must include an executive summary in table form, expressing a clear binary view for all legal entities and all counterparty categories.
  • The law firm must also provide that data in machine ingestible standard form (FPML or something similar)

Likely objections

“It is too hard. This will be a lot of work.” (Short term, yes, but long term it will save a colossal amount of wasteage.)

“There will be a lot of stakeholders and the process will be very difficult to manage.” (True, but surmountable.)

“The existing process is well established, and works well enough, and should not be disrupted.” (False.)

“This will create some conflict/redundancy among the industry associations” (It will reveal it, not create it.)

It will not be popular with law firms (Probably not as true as it might seem.)

This is anti-competitive. (It isn’t)