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Close-out netting: Difference between revisions
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== Introduction == | == Introduction == | ||
Netting is generally defined in financial terms as when we allow a positive value and a negative value to set-off one another, partially or entirely cancelling one another out. | Netting is generally defined in financial terms as when we allow a positive value and a negative value to set-off one another, partially or entirely cancelling one another out. | ||
[[Close-out netting]] is the process of doing that under a master agreement such as the {{isdama}} when one party defaults or goes insolvent. Because an {{isdama}} may have many transactions under it, some with positive and some with negative [[mark-to-market]] exposures, the ability to agregate all these exposures down to a single net sum - known as "netting down" - is very important when calculating risk weighting. (the alternative is to treat all positive exposures as creditors claims subject to allocation in the insolvency and all negative exposures as unconditional obligations). | |||
In order to achieve that "net" treatment the {{tag|FCA}}'s BIPRU Rules (see BIPRU {{bipruprov|13.6.7}}) stipulate that we need legal opinions from all relevant jurisdictions that the concept of "close out netting" would be effective in the insolvency of the counterparty. In most developed legal jursidictions such opinions are available, but in emerging jurisdictions it is ofen more challenging. | |||
==Close Out Netting== | ==Close Out Netting== | ||