Template:Derivatives as specified indebtedness

Derivatives as Specified Indebtedness

Be wary of including derivatives in the definition of Specified Indebtedness, no matter how high the Threshold Amount (we would say never do it, but realistically the wise minds of the credit department may well be beyond your calming influence, so you may not have a choice).

The Cross Default language aggregates up all individual defaults, so even though a single ISDA 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 deposits: operational failure or regulatory action can create an immediate problem, especially for banks.

Now it is true that you might provide the indebtedness under a master trading agreement be calculated by reference to its net close-out amount, but this only really points up the imbalance between buyside and sell-side. Buy-side managers may have fifty or even a hundred ISDA Master Agreements, split across dozens of different funds. Broker-dealers will have tens of thousands facing the same legal entity. You are short an option, fellas. Now seeing as most trading agreemetns are fully collateralised, and so don’t represent material indebtedness, it may be that even so, no threshold is at risk. But if no threshold is ever at risk, then why are you including thge ISDA Master Agreement in the first place?

O tempora. O paradox.