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Given that the “amount originally borrowed” under a swap is, nominally, zero, the raw market exposure of a portfolio of swaps can be huge compared with that original capital commitment. The total of all your [[out-of-the-money]] positions, which you can assume you must perform, versus all your in-the-money positions, for payment of which you will be an unsecured creditor. | Given that the “amount originally borrowed” under a swap is, nominally, zero, the raw market exposure of a portfolio of swaps can be huge compared with that original capital commitment. The total of all your [[out-of-the-money]] positions, which you can assume you must perform, versus all your in-the-money positions, for payment of which you will be an unsecured creditor. | ||
But here is the beauty of the Single Agreement: if you can offset your [[out-of-the-money]] positions against your in-the-money positions, and be an unsecured creditor only for the difference between them — especially, as is usual these days, the bank has [[variation margin]] reflecting the difference< | But here is the beauty of the Single Agreement: if you can offset your [[out-of-the-money]] positions against your in-the-money positions, and be an unsecured creditor only for the difference between them — especially, as is usual these days, the bank has [[variation margin]] reflecting the difference<ref>Though bilateral variation margin has its dark nemesis. There will be a separate essay about this.</ref> — things look a lot rosier from a regulatory capital perspective. On “margined” transactions, the parties’ net mark-to-market exposure resets to zero every day.<ref>The capital calculation is extremely complicated, but this offsetting effect is powerful.</ref> | ||
The “standard of proof” for “netting down” transaction exposures in this way is also huge: regulations require banks to obtain and keep up-to-date a battery of external [[Netting opinion|legal opinion]]<nowiki/>s — one for each counterparty type in each jurisdiction that the bank trades against, for each type of master agreement — that the netting contract actually [[Would-level opinion|''will'']] — not just ''should'' — work in all relevant jurisdictions: the bank’s, the counterparties, its branches, and the location of any assets. We have more to say about [[Netting opinion|netting opinions elsewhere]]. | The “standard of proof” for “netting down” transaction exposures in this way is also huge: regulations require banks to obtain and keep up-to-date a battery of external [[Netting opinion|legal opinion]]<nowiki/>s — one for each counterparty type in each jurisdiction that the bank trades against, for each type of master agreement — that the netting contract actually [[Would-level opinion|''will'']] — not just ''should'' — work in all relevant jurisdictions: the bank’s, the counterparties, its branches, and the location of any assets. We have more to say about [[Netting opinion|netting opinions elsewhere]]. | ||