Closing out

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Closing out is a process at credit institutions in which an open banking book or trading book position is neutralized by an exactly opposite transaction with the aim of minimizing risk. Like hedging and closing, closeouts are among the risk reduction strategies.

Customer business and proprietary trading

As a result of transactions in customer business and also in proprietary trading (see interbank trading ), credit institutions have open positions that are subject to a market price risk and a counterparty risk .

For this reason, these open positions must be backed by the own funds of a credit institution in accordance with Section 294 ff. SolvV . If the total open positions (according to one of the two alternatives) exceed 2% of own funds, these open positions must be weighted with 8% (Section 294 (3) SolvV). This automatically results in a volume limitation of the risk-intensive open positions.

For this reason alone, when determining these risks on a daily basis, it is necessary to check the impact of these risks on the core capital ratio . It can therefore make sense not to hold positions acquired in the customer area, but to close them out congruently (congruent) in interbank trading. This also applies vice versa for existing positions that are sold to customers as required and are to be balanced again in interbank trading. This means that, on the one hand, negative effects on the core capital ratio and, on the other hand, banking risks can be reduced or even completely eliminated through closeouts. This neutralizes an open position and no longer has to be backed with equity.

Closing requirements

Any position in the banking or trading book that is not secured by a counter-transaction with the same amount and maturity is an open position. This is exposed to the risk of asset losses because it is subject to a specific risk of changes in market prices. Each open position (“solo position”; “outright business”) can only take one of two possible basic orientations: It is either “long” or “short”. Anyone who sells as an opening transaction without owning the corresponding stocks goes “ short ” (“ short sale ”). This creates a de jure performance obligation that can be fulfilled at a later date, which is subject to a market price risk (forward sales contract in the legal sense; from a commercial point of view: short position, "negative position" for derivatives). Anyone holding a short position expects falling prices and bears the risk of rising prices.

An open position is only considered closed if it is covered by a reverse transaction in terms of amount, duration and the type of base value . Elements of closing out are therefore maturity congruence, identical counter-transaction, opposite direction or simply closing an open position (see Settlement (finance) ).

For example, if a bank bought $ 10 million forward on June 30th due September 30th and then sells $ 10 million forward on July 15th due October 15th, a closeout will only occur in the period between July 15 and September 30 before; before and after the bank shows an open position. The limiting factor are therefore the conditions of the countertrade, which must be compared with the conditions of the outright transaction with regard to closing issues.

Only when the owner of a long position a matching maturities and amounts (exactly congruent) Short position and vice versa acquires, is a closeout. However, if the amount, financial instrument and / or term of the counter-transaction do not match, some open positions remain, which must be backed by equity.

Special features apply to futures . The overwhelming majority of the market participants active in the futures markets obviously do not intend to actually physically purchase or deliver the underlying assets of the individual futures , but rather wish to benefit directly from their short-term price movements. Although physical delivery would be possible in many cases, most futures traders still prefer to close out their open positions before their final maturity in order to realize their result in monetary terms.

In the case of futures, an open position is only considered to be closed if the countertrade

  • has a standardized underlying that corresponds to the open position,
  • belongs to the same standardized contract month and
  • is traded on the same futures exchange as the contract to be liquidated.

For all contracts with uniform specifications (same futures series) and which are traded both traditionally and electronically on the futures exchange in question, both trading platforms are usually available there alternatively for closing out. Exceptions occur when futures contracts ("futures series") that are listed on different stock exchanges have uniform specifications and, in addition, there are prior legal agreements between two or more futures exchanges for closing and final settlement ("offset agreements", "clearing" left ") were hit by futures (integration of clearing and settlement," cross-border clearing ").

Success realization

According to the reasons for the 6th amendment to the KWG, “proprietary trading success” is to be understood as the net income or expenses in accordance with Section 340c (1) HGB (trading portfolio). Proprietary trading profit is deemed to have been realized when the closing is booked, because profit contributions are only to be taken into account if they are realized on the balance sheet date ( Section 252 (1) No. 4 HGB). Success is only realized when the close-out is posted.

Individual evidence

  1. Hans E. Büschgen, Bankbetriebslehre , 1998, p. 1021
  2. Hans E. Büschgen, Bankbetriebslehre , 1998, p. 1033
  3. Rolf Beike / Andreas Barckow, Risk Management with Financial Derivatives , 2002, p. 22.
  4. Rolf Beike / Andreas Barckow, Risk Management with Financial Derivatives , 2002, p. 11.
  5. Börse-Go about futures
  6. Section 340c (1) of the German Commercial Code (HGB) reads: "The difference between income and expenses from transactions in trading securities, financial instruments, foreign exchange and precious metals as well as income from write-ups and expenses from depreciation of these assets is to be shown as income or expense from financial transactions ... . "