The Futures and Options Association has launched its new legal opinions library – Netting Analyser - which will help subscribing firms to satisfy certain prudential regulatory requirements and reduce the increasing cost of regulatory capital.
Firms are generally required, by applicable regulatory capital rules, to hold capital against their derivative transaction exposures. Under capital regulations in the UK and many other jurisdictions, such capital must generally be held against gross transaction exposures, except where a firm has access to legal opinions confirming the effectiveness of any netting provisions contained in the contractual documentation it has in place with clients. In this case capital may be held against the net exposure.
The ability to hold capital against net, rather than gross, exposures is particularly significant given the increase in general capital requirements and introduction of the requirement to hold regulatory capital against CCP exposures, stemming from the implementation of new capital requirements under Basel III/CRD/R IV.
In addition, under many capital regulations, firms may only recognise credit risk mitigation techniques (such as funded collateral), where such techniques are supported by legal opinions or other legal due diligence.
FOA’s new netting opinions library, developed in cooperation with Clifford Chance LLP, aims to provide access to a wider range of legal opinions than is currently available in the market. It comprises of three sections:
- netting opinions
- collateral opinions
- CCP opinions
Netting Analyser has expanded the number of jurisdictions covered by a positive netting opinion to 75, the most extensive library of netting opinions available. In addition to these netting opinions, members are able to subscribe to 76 collateral opinions and 46 CCP opinions from 28 jurisdictions. Subscribers have access to “summary tables”, which facilitate quick and easy access to the most important information from the legal opinions across all relevant jurisdictions.
The new netting and collateral opinions are drafted on the basis of a wide range of current and historical FOA model form terms of business documentation. In addition, subscribers are able to rely on the netting and collateral opinions in respect of transactions traded, and collateral posted, under "Equivalent Agreements".
The netting opinions address the effectiveness of:
- close-out netting provisions
- set-off provisions
- title transfer collateral provisions
The collateral opinions:
- address the effectiveness of collateral taken on a security interest basis
- take into account, where appropriate, the FOA's standard rehypothecation clause
The CCP opinions cover, at a minimum, cleared exchange traded derivative (and in some cases, OTC derivative) exposures with CCPs and shall address:
- the effectiveness of netting and set-off against the CCP on the CCP's default
- whether cash and non-cash collateral posted with a CCP is bankruptcy remote in the case of the insolvency of the CCP
Hugo Jenkins, Managing Director of the FOA said, “Being able to access a wide range of legal opinions via the Netting Analyser Library should be very cost effective for firms when compared to the cost of procuring such opinions independently. In addition, the legal opinions benefitted from a comprehensive review process which involved, not only Clifford Chance, but also a significant number of in-house legal counsel at FOA member firms.”
SUMMARY
Netting Analyser Library
- Comprises Netting, Collateral and CCP netting opinions
- Covers 75+ jurisdictions and 46 CCPs
- All opinions will be subject to an annual review and update process as required
What benefits do legal opinions bring?
- ability to hold regulatory capital against net, rather than gross exposures (particularly noting the introduction of capital requirements for CCP exposures) - reduced counterparty (credit) risk and market risk in case of counterparty's default
- ability to recognise other credit risk mitigation techniques for regulatory capital purposes
- cost savings of participating in a shared project, with economies of scale (annual review and updating costs will be shared across all subscribers, opinions available in "packs", so no requests for individual opinions are required; substantial savings when compared to the costs of direct procurement)
- easy on-line access to a vital legal information resource
How much does it cost to join Netting Analyser?
The subscription fees consist of an upfront fee for the opinions themselves and an annual maintenance fee which will cover a yearly review and update to applicable opinions. Non-FOA members subscribing to Netting Analyser shall pay a premium fee.
