Netting (finance)
Under netting are in finance all methods for the reduction of payment , foreign currency , credit or liquidity risk between two parties within a contractually agreed settlement procedure ( bilateral netting ) or more parties within an institutionalized billing system ( multilateral netting ) understood that bilateral use or contain multilateral billing algorithms .
General
The prerequisite for netting is that two or more contractual partners ( counterparties ) have mutually offset performance obligations from contracts concluded with one another.
In Bank supervisory right netting is used as reducing the default risk of a bank referred to a business partner by offsetting two contradictory claims by law or contractual obligations.
There are intensive business relationships with mutual monetary performance obligations, particularly in banking and insurance . Here money , securities , foreign exchange or derivatives are exchanged for money or other consideration . For each of the partners ( counterparties ) there is the risk that the other part will not meet its obligations by the mutual fulfillment date, while its own obligation has already been fulfilled. The longer the mutual fulfillment dates are after the date of the transaction, the higher this risk. An upstream services risk arises when a bank financial instruments paid before they received their delivery or vice versa, or in cross-border transactions, more has elapsed since the payment or delivery at least one day (Art. 379 Kapitaladäquanzverordnung ). Both versions ultimately involve a bankruptcy danger, of each of the counterparties subject (known as " Herstatt risk "). This risk increases with the volume of mutual transactions .
For example, if a bank buys securities for EUR 1 million from another bank and has paid the purchase price immediately, but the other bank can no longer deliver the securities due to its own insolvency, the buying bank has an insolvency claim of EUR 1 million, which it wholly or for the most part is no longer recovered. She suffers a loss of assets due to the bankruptcy of her counterparty. If, however, the insolvent counterparty from another transaction has an equally high counter-position and both have concluded a netting agreement, these positions are offset with the result that neither side incurs insolvency-related asset losses.
The term offsetting algorithm is used to describe methods with the help of which the offsetting problem can be efficiently solved. In order to standardize the content of the contract, the ISDA and other associations have developed standard contracts (e.g. the ISDA Master Agreements , the German Framework Agreement for Financial Futures, the European Framework Agreement), which are concluded as netting agreements between the counterparties and a certain type of netting for Have content.
Types of netting
Netting is a type of offsetting used in the financial sector. Due to the interbank trade and the intensive monetary interdependence of the credit institutions, the need arose - especially because of the risk of bankruptcy of the business partners - to offset mutual claims and liabilities against each other as far as possible . There are three types of netting, depending on the purpose.
Close-out netting
The most important form of netting in banking is the so-called “close-out netting” (or “liquidation netting”; close out means writing off previous receivables). A “ legal second ” before a contractually pre-defined insolvency event occurs, all ongoing transactions under an offsetting agreement (e.g. ISDA Master Agreement or German Framework Agreement for Financial Futures) are terminated due to the close-out netting clause contained therein . It is therefore a close- out after the contract has ended. In the close-out clause , the parties involved in the netting agree that if a defined event occurs (see also credit event ) that could endanger the contractual relationship (e.g. default in payment or delivery), the mutual contractual relationships are terminated immediately . This is linked to an immediate settlement and a final balance adjustment. The close-out netting is focused primarily on the security function of an existing set-off location. If someone is debtor and creditor from different transactions at the same time , the law also allows him to set off in the context of insolvency (§ § 94 ff. InsO). This secures him the possibility of offsetting against the otherwise impending loss.
In place of these performance obligations that existed until the occurrence of the insolvency offense and have now expired, a new, uniform claim for damages will appear . This includes in particular the offsetting of all mutual claims existing at this point in time based on their market values. This is why the process is called “netting” because, in the worst case, only this calculated net balance has to be paid to the masses or represents the highest possible loss. This significantly reduces the risk of bankruptcy.
Novation netting
Another form of netting is the rarer novation netting, which affects derivative financial transactions. Contracts included in the novation netting (usually currency forwards ) are lost and replaced by a new contract equal to the balance of all contracts. On the basis of this bilateral debt conversion agreement, all existing claims will be converted into a new obligation by means of a novation agreement (ongoing) ; the previous ones expire because of the novation . A new current balance is continuously created . Despite its regulatory recognition, novation netting has hardly any significance in practice.
Since these contractual agreements could, however, disadvantage other creditors of the masses insofar as they usually do not have such a netting option in the event of insolvency, this contractual agreement is fraught with (international) legal risks (especially insolvency law). For this reason, standard framework agreements (e.g. the ISDA framework agreements or the German framework agreement for financial futures) that are commonly used or recommended by the central associations of the institutes are to be used, and the institutes have to check the enforceability and effectiveness of these framework agreements "by means of suitable legal opinions" convince (Article 296 Capital Adequacy Ordinance). Corresponding reports are obtained from international and national associations for their members and updated regularly. Various service providers also offer systems for evaluating the statements contained in the legal opinions on the admissibility of netting depending on product types (especially those of over- the -counter trading , but also see ISDA ), the legal system of the registered office and branch of the contractual partner, individual contract supplements and other criteria and check automatically (e.g. the LeDIS or Framesoft Contract Repository (FCR) ).
Payment netting
The payment netting ( English netting payment ) includes the settlement of current interbank payments, so the automatic position set off like a Staffelkontokorrents, whereby only the difference between two amounts in the same currency ( balance ) must be paid. As a rule, the same due dates and the same currency must be available, i.e. opposing claims and obligations of business partners. Payment transaction netting reduces the wholesale risk (“ Herstatt risk”). The exchange systems Clearstream and Euroclear act as intermediaries between the counterparties. You only release a contract as fulfilled when the mutual contractual obligations from a transaction have been compared against each other ("synchronous matching").
Banks also agree on so-called payment netting agreements that go beyond this , in which unequal payments are offset in order to reduce the risk of capital default. Such agreements are common in currency and securities transactions.
Recognition under banking supervisory law
With banks are generally subject to all financial instruments in the portfolio of the investment and trading book an equity credit , must therefore be covered as risky assets with equity. Within the Solvency Regulation , however, the possibility was since October 1996, banks provided swaps and other designed as fixed contracts or rights transactions to be credited with a reduced credit equivalent amount (so-called credit conversion factor CCF), has been if the transactions involved effectively in a recognized netting were.
The basis for this regulation was for the first time Directive 96/10 / EC of March 31, 1996 with regard to the regulatory recognition of debt conversion agreements ( novation ) and offsetting agreements ("contractual netting"), which came with the announcement of the amendment and addition to Principle I. of October 2, 1996 was implemented in German law.
Since January 2014, the SolvV has been replaced by the Capital Adequacy Ordinance (CRR), which deals extensively with netting. According to the legal definition in Article 296 (2a) of the CRR, netting creates “a single legal obligation for all recorded transactions, so that in the event of default by the contractual partner, the institution is only entitled to the balance of the positive and negative market values of the recorded individual transactions or is obliged to pay it is ". In Article 195 CRR, netting of reciprocal claims for credit institutions is recognized as a permitted credit risk mitigation . According to Art. 196 CRR, bilateral netting agreements for repurchase agreements , securities or goods lending or lending transactions or other capital market transactions with a counterparty (including non-banks ) may be taken into account. You must then meet the following requirements in accordance with Article 205 CRR:
- Even if the counterparty becomes insolvent, netting agreements must be legally effective and enforceable in all legal systems .
- Receivables and liabilities can be determined at any time,
- Netting positions must be continuously monitored
- Netting agreements must give the non-defaulting party the right to terminate and close out the affected transactions promptly in the event of default and to offset the profits and losses against each other so that one party owes the other a single net amount (Art. 206 a and b CRR).
According to Art. 206 CRR, this also applies to framework netting agreements for repurchase agreements, securities or goods lending or lending transactions or other capital market transactions. If netting agreements meet these requirements, this leads to a reduction in the risk positions , so that less capital is required.
According to Art. 221 CRR, institutions can, with the permission of the banking supervisory authority, as an alternative to the volatility adjustments specified by the supervisory authority or based on their own estimates, for the calculation of the fully adjusted risk exposure value resulting from the application of a recognizable netting framework agreement that is not based on derivative transactions , results, use internal models.
Differentiation from clearing
Clearing is the procedural process of a settlement in which data and / or receipts with regard to money, foreign exchange or securities transfers are presented and exchanged at a single location and the net position of each settlement participant is calculated, if necessary. This process is not associated with any legal evaluation, but netting with its consensual offsetting does . Clearing is therefore the generic term. The offsetting processes that take place within corporate groups in corporate finance and cash management are sometimes referred to as netting. Continuous Linked Settlement is an institutionalized billing system that is used particularly in foreign exchange trading to avoid mutual settlement risks .
Use
Netting reduces the mutual insolvency risk of the counterparties and thus the risk of losses. A large number of individual items is reduced to a few. If credit institutions are involved, there is a reduced crediting of own funds, which is estimated by the Basel Committee on Banking Supervision to be up to 40% of the total equity position. As a result, interbank transactions only burden the equity of the credit institutions concerned to a very small extent, so that greater potential remains free for banking business with customers.
Individual evidence
- ↑ Klaus Peter Berger, The Offsetting Contract , 1996, p. 22.
- ↑ The solvent party consequently does not have to pay its gross performance obligations to the insolvency estate, while its own respective gross claims would only be dependent on the insolvency quota.
- ↑ Thomas Thiedemann: The position of the central counterparty in German and English securities trading , 2011, p. 26.
- ↑ Klaus Peter Berger: The offsetting contract , 1996, p. 28.
- ↑ Directive 96/10 / EC of the European Parliament and of the Council of March 21, 1996 amending Directive 89/647 / EEC with regard to the regulatory recognition of debt conversion agreements and set-off agreements ("contractual netting")
- ↑ Klaus Peter Berger: The offsetting contract , 1996, p. 36.
- ↑ Klaus Peter Berger: The set-off contract , 1996, p. 42 ff.
- ↑ Commission of the European Communities: The finality of accounting and the provision of securities in payment systems (PDF) , May 30, 1996, 96/0126, p. 6.
- ↑ Klaus Peter Berger: The offsetting contract , 1996, p. 24.