Master Netting Agreement Derivatives

12 Dec

The competent regulator is likely to revoke an internal master model accounting approval compensation contract if a company no longer meets BIPRU 5`s requirements regarding the approach to the internal model master`s compensation agreement. The internal clearing agreement approach1 is an alternative to the use of the Volatility Corrections Monitoring approach or own estimates of volatility adjustments in the calculation of volatility corrections for the purposes of calculating fully adjusted risk-exposed value (E), resulting from the application of an eligible master compensation contract including pension transactions, ready-to-wear or securities or commodity transactions, or foreign and/or other over-the-counter transactions. The internal models of the master compensation agreement take into account the correlation effects between securities positions subject to a “master netting” agreement and the liquidity of the instruments concerned. The internal model used for the internal approach of the master compensation agreement model must contain estimates of the potential change in the value of the unsecured risk amount (∑E-∑C). Over-the-counter derivatives are mainly used for security purposes. For example, a company can protect itself against unfavourable movements at medium- or long-term interest rates by taking out an interest rate swap to “block” a fixed interest rate for a period of time. Over-the-counter derivatives can also be used for speculation. An entity must be able to convince the relevant regulator that the company`s risk management system for managing the risks resulting from transactions covered by the master compensation agreement is well designed and implemented with integrity, including that the minimum qualitative standards set out in paragraph 2 – (11) are met. Without prejudice to the recognition of BIPRU 14, the security and assets incorporated under these agreements must meet the eligibility requirements for guarantees in accordance with BIPRU 5.4.2 R to BIPRU 5.4.8 R. An area in which a portion of an over-the-counter transaction may be attacked by its counterparty if the transactions “go south” is when the counterparty relied on the party in the transaction and the party owed some kind of trust to the other or deceptively behaved to induce the counterparty to enter into the deal.