Netting
Netting are in the financial sector, all methods for reduction of payment, foreign exchange, credit or liquidity risks between two parties within a contractually agreed settlement procedure ( bilateral netting) or more Parties within an institutionalized accounting system ( multilateral netting ) understood that the use of bilateral or have multilateral clearing algorithms for content.
In the banking supervisory law netting is referred to as a reduction of the credit risk of a bank against any counterparty by netting two contradictory claims by law or contractual obligations.
General
Condition is therefore that two contractors permanently enter into transactions with each other and thereby arise aufrechenbare mutual performance obligations.
Intense relationships with mutual monetary obligation to pay benefits, particularly in banking and insurance. Here money, securities, foreign exchange or derivatives are exchanged for money or other consideration. It is for each of the partners ( " Counterparty " ) the risk that the other party to the mutual settlement on its obligations, while the own obligation has already been met. In § 11 paragraph 3 of the Solvency Regulation is counterparty risk, the speech, with a long settlement period is present if more than five business days between trading and settlement date. The longer the completion dates are downstream in time to the day of the transaction, the higher the risk. An intermediate risk arises when securities, foreign exchange or derivatives were paid, but have not yet been delivered, or vice versa ( § 14 paragraph 1 of the Solvency Regulation ). Both versions include ultimately a threat of insolvency, of any of the counterparties subject (so-called " Herstatt risk "). This risk increases exponentially with the volume of mutual transactions.
Buys example, a bank securities for EUR 1 million from another bank and paid the purchase price immediately, but the other bank can no longer deliver the securities for their own bankruptcy, so the purchasing bank has a bankruptcy claim of 1 million euros, the whole or mostly no longer be recovered. She suffers from the insolvency of their counterparty an asset loss. Has now but the insolvent counterparty from another store an equal opposite position, and both have a netting closed, so these items are netted with the result that both sides are no insolvency -related property losses.
When clearing algorithm used to describe procedures by which the offsetting problem can be solved efficiently. In order to standardize the content of the contract, the ISDA and other organizations have standard contracts developed (eg, the ISDA Master Agreement, the German Master Agreement for Financial Derivatives, the European Framework Agreement) have to be completed as netting agreements between the counterparty and a certain type of netting to content.
Types of netting
The netting is an itemized version of the financial sector. Through the Interbank trading and the intensive monetary interdependence of credit institutions with each other was - especially because of the risk of insolvency of the business partners - the requirement that mutual receivables and liabilities as far as possible off against each other. Depending on the intended purpose of there are three types of netting.
Close- out netting
The most important form of netting is in the banking industry, the so-called " close-out netting " (or " close-out netting "; close-out in English means " write off " of the previous claims). "Legal seconds " before a contractually predefined insolvency event stops all under a netting agreement (for B.ISDA Master Agreement or German Master Agreement for Financial Futures) or ongoing business because of it contains close-out netting clause. It thus is a closeout after termination of contract. For in the close-out clause arrange the parties to the netting that if a defined event ( see also credit event ), which could jeopardize the contractual relationship ( eg, payment or delivery delay ), the mutual contractual relationship be terminated immediately. In order for a prompt settlement and a final balance compensation is connected. The close-out netting is focused primarily on the backup feature to an existing set-off location. Being simultaneously debtors and creditors from different stores, allows him the law also set-off in the context of insolvency (§ § 94 ff Insolvency Act ). Thus the off chance it protects from the otherwise impending loss.
In place of these until the onset of insolvency facts existing and now extinct performance obligations enters new uniform compensation claim. This includes especially the balancing of all existing at that time claims on the basis of their market values . Therefore, the operation " netting " because only this calculated net balance is the worst case still be made to the estate, or represents the highest possible failure. The insolvency risk is considerably reduced in this way.
Novationsnetting
Another form of netting is the rarer Novationsnetting that affects financial derivative transactions. In this case, go to the novation netting included contracts under (usually foreign exchange contracts) and by a new contract in the amount of the balance of all contracts replaced. Because of this bilateral contract for novation all existing claims by Novation agreement (ongoing) are transferred to a new obligation; the previous go out because of the Novation. It continuously creates a new current balance. Despite its regulatory approval ( § 8 GroMiKV ) the Novationsnetting hardly has a significant importance in practice.
Since these contractual arrangements may, however, discriminate against other creditors of the mass in so far as these do not have a rule about such Saldierungsmöglichkeit in case of insolvency, this contract dispute is subject to the (international ) legal risks (especially insolvency legal). The Solvency Regulation therefore requires the use of common or recommended by the pointed Associations of the Institutes standardized master agreements (such as the ISDA master agreements or the German Master Agreement for Financial Derivatives ) and also that the institutions " based on suitable legal opinion " of the enforceability and effectiveness of the framework agreements by appropriate legal opinion has convinced ( § 206 of the Solvency Regulation ). Corresponding reports are obtained from international and national associations for their members and regularly updated. Different service providers also offer systems for evaluation of the statements contained in the legal opinion on the admissibility of the netting as a function of product types ( especially those of the so-called OTC trading, but see at ISDA), legal seat and office of the contractor, individual contract amendments and Manage other criteria and test automated ( eg LeDIS or Framesoft Contract repository ( FCR ) ).
Payment netting
The payment netting covers the settlement of ongoing interbank payments, so the automatic position off like a Staffelkontokorrents, leaving only the difference between the two amounts to be paid in the same currency. As a rule, it must same maturity and same currency available, so opposing claims and obligations of business partners. The payment netting reduces delivery risk ( " Herstatt risk "). The Payment netting procedures include exchange-based systems Clearstream or Euro Clear. Both are a central Nettinginstanz that takes as an intermediary between the actual counterparty billing. Here, a synchronous matching of securities and money side of a securities contract. Banks agree also known as payment netting agreements, where in order to reduce the principal risk not simultaneous, newspaper corpse cash flow services are billed. Such agreements are common in the monetary and fiscal effect common.
Netting in the Solvency Regulation
For credit institutions normally subject to all financial instruments in the portfolio of the banking and trading book an equity transfer, therefore, must be covered as risky assets with equity. Within the Solvency Regulation, however, provides for the possibility for banks to credit swaps and other designed as a hard business, or rights, transactions with a reduced credit equivalent amount (so-called credit conversion factor CCF), when the shops are validly incorporated in a recognized netting.
The basis for this scheme for the first time Directive 96/10/EC of 31 March 1996 with a view to the supervisory recognition of contracts for novation and netting agreements ( " contractual netting " ), with the notice of amendment and supplement of Principle I of 2 October 1996 was implemented into German law. After novation ( novated ) had been recognized by the German banking regulators already at the 4th German Banking Act amendment to reduce risk, was the Nettingrichtlinie first time, the risk-reducing effect of a " close- out netting " recognized. Accordingly, the BaFin since the implementation of the Directive differs based on the legal form of the netting agreement between the agreement of a Liquidationsnettings and agreeing an Novationsnettings. The rules concerning the content of the netting agreements are regulated. § 12 para 1 SolvVO contains a legal definition of netting as " netting ", after which it is formed from all claims and liabilities arising from derivatives, which are covered by an eligible netting agreement in accordance with § 207 SolvVO. For this purpose, in accordance with § 12 para 5 SolvVO no risk-weighted assets to be included ( "zero credit "). According to § 206 para 2 SolvVO such Nettingvertrag has to fulfill certain legal minimum requirements. Thus, the really simplistic term was " off " even to the fixed legal term in a German special law.
Demarcation to the Clearing
Clearing is the procedural lapse of a settlement, in which data and / or documents in regard to money, foreign exchange or securities transfers presented in a single place and exchanged, and where appropriate, the net position of each participant's payroll is calculated. This process is not affiliated with any legal assessment, the netting but with its consensual off already. Clearing is thus the generic term. Also taking place within groups of offsetting transactions within the Group Finance and Cash Management are sometimes referred to as netting. A particular in forex trading occupied, institutionalized accounting system in order to avoid mutual settlement risk is the Continuous Linked Settlement.
Benefit
Netting reduces the mutual insolvency risk of the counterparties and the risk of losses. A large number of individual items is reduced to a few. Are banks involved, resulting in a reduced own funds debit has been assessed by the Basel Committee on Banking Supervision at up to 40% of total equity. This means that interbank transactions only to a very limited extent, the equity of the affected banks charge so freely remain greater potential for the banking business with customers.