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Template:Derivatives as specified indebtedness: Difference between revisions
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====[[Derivatives]] as {{ | ====[[Derivatives]] as {{{{{1}}}|Specified Indebtedness}}==== | ||
Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{ | Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{{{{1}}}|Specified Indebtedness}}, no matter how high a {{{{{1}}}|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. | ||
{{ | In its unadulterated formulation, {{{{{1}}}|Cross Default}} aggregates up all {{{{{1}}}|Transaction}}-level defaults, so even though a single {{isdama}} would be unlikely to have a ''net'' [[out-of-the-money]] [[MTM]] of anywhere near the {{{{{1}}}|Threshold Amount}}, a large number of individual {{{{{1}}}|Transaction}} [[MTM]]s, if aggregated, may — particularly if you’re selective about which {{{{{1}}}|Transaction}}s you’re counting — ''which {{{{{1}}}|Cross Default}} entitles you to be''. | ||
Thus, where you have a large number of small failures, you can still have a big problem. This is why | Thus, where you have a large number of small failures, you can still have a big problem. (This is why [[bank]]s should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem). | ||
Now it is true that you can | Now it is true that you can require the {{{{{1}}}|Specified Indebtedness}} of a [[master trading agreement]] to 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, fund managers may have fifty or even a hundred {{isdama}}s, but they will be split across dozens of different funds., each a different entity with its own {{{{{1}}}|Threshold Amount}}. [[Broker dealer|Broker-dealer]]s, on the other hand, will have literally ''hundreds of thousands of [[master agreement]]s, all facing the same legal entity''. Credit dudes: ''you are the wrong side of this risk, fellas''. | ||
Now seeing as most trading | Now seeing as most [[master trading agreement]]s are fully collateralised, and so don’t represent material [[indebtedness]] on a netted basis anyway, it may be that even with hundreds of thousands of the blighters, no-one’s {{{{{1}}}|Threshold Amount}} will ever be seriously threatened. But if no {{{{{1}}}|Threshold Amount}} is ever at risk from an {{isdama}}, then ''why are you including the {{isdama}} in {{{{{1}}}|Specified Indebtedness}} in the first place?'' | ||
O tempora. O [[paradox]]. <br> | O tempora. O [[paradox]]. <br> | ||