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====[[Derivatives]] as {{isdaprov|Specified Indebtedness}}==== | ====[[Derivatives]] as {{isdaprov|Specified Indebtedness}}==== | ||
Be wary of including derivatives in the definition of {{isdaprov|Specified Indebtedness}}, no matter how high | Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{isdaprov|Specified Indebtedness}}, no matter how high a {{isdaprov|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. | ||
{{isdaprov|Cross Default}} aggregates up all individual defaults, so even though a single {{isdama}} would be unlikely to have a ''net'' out-of-the-money [[MTM]] of anything like 3% of shareholders’ funds, a large number of individual transactions if aggregated may, particularly if you’re selective about which transactions you’re counting — which the language entitles you to be. | |||
Thus, where you have a large number of small failures, you can still have a big problem. This is why you should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem, especially for banks. | Thus, where you have a large number of small failures, you can still have a big problem. This is why you should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem, especially for banks. | ||
Now it is true that you | Now it is true that you can provide the {{isdaprov|Specified Indebtedness}} represented by a [[master trading agreement]] can 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, buy-side managers may have fifty or even a hundred {{isdama}}s but they will be split across dozens of different funds. [[Broker dealer|Broker-dealer]]s, on the other hand, will have ''hundreds of thousands of [[master agreement]]s, all facing the same legal entity''. Credit dudes: ''you are the wrong side of this risk, fellas''. | ||
O tempora. O [[paradox]]. | Now seeing as most trading agreements are fully collateralised, and so don’t represent material indebtedness on a netted basis, it may be that even with hundreds of thousands of the blighters, no-one’s {{isdaprov|Threshold}} is ever seriously threatened. But if no threshold is ever at risk, then ''why are you including the {{isdama}} in {{isdaprov|Specified Indebtedness}} in the first place?'' | ||
O tempora. O [[paradox]]. <br> |