Читать книгу XVA - Green Andrew - Страница 24

A close-out netting agreement provides the legal framework for assets and liabilities to be netted together when closing out a portfolio of derivatives in the event of a default of one of the counterparties. Close-out netting significantly reduces credit exposure, with research by ISDA suggesting a reduction of 85 % (Mengle, 2010). To see how this works consider the following example where A and B have two derivatives transactions between them, one with a value of £1m and the second with a value of −£0.5m as seen by A. B then defaults and A recovers 40 % of the claim value. If the two derivatives net then the credit exposure at default is £0.5m and A will recover £0.2m, a net loss of £0.3m. However, if the trades do not net each trade will be treated separately with A recovering £0.4m on the trade with a value of £1m but having to pay £0.5m back to the administrators of B on the second transaction with a negative value. A’s net position is −£0.1m with no netting, a net loss of £0.6m. This is illustrated in Figure 2.2.

Figure 2.2 The impact of close-out netting reducing overall credit exposure.

Netting is enshrined in the ISDA Master Agreement which is the bilateral agreement between counterparties that provides the legal framework for OTC derivative trading. Netting is enshrined in English law but in some other jurisdictions separate legislation has been needed to allow close-out netting to be implemented. The legal enforceability of netting remains a concern for market participants and the use of netting has faced challenges in the aftermath of the 2008 financial crisis (Mengle, 2010).