Derivatives Group Talks Up Netting Expertise to Lure Regionals into Fold

By Dunaief, Daniel | American Banker, June 23, 1995 | Go to article overview

Derivatives Group Talks Up Netting Expertise to Lure Regionals into Fold


Dunaief, Daniel, American Banker


The International Swaps and Derivatives Association is pitching membership to regional banks that are burdened by the legal fees associated

with derivatives contracts.

At issue is the ability of these companies to "net" their derivatives contracts with another institution - rather than account for the contracts

individually - and thus lower the amount of capital they must hold.

The association can provide the legal opinions needed for netting inexpensively and has noted a strong demand in the marketplace, said Gay H.

Evans, managing director of Bankers Trust International and chairman of the

association.

"We have heard from several of our nonmembers (about membership) because

of the ability to net for capital adequacy purposes," Ms. Evans said. "For

them to purchase legal opinions on their own is an expensive prospect."

The association's attorneys formulate netting opinions annually for 23 different jurisdictions, including the United States. For nonmembers who hire lawyers, the cost of getting these opinions independently could be a significant drain on profits.

"$10,000 is a chunk of money, but it's trivial compared to either the legal fees or the capital costs if you aren't the beneficiary of netting arrangements," said John P.C. Duncan, a partner in the Chicago office of Jones, Day, Reavis & Pogue.

Netting provides banks and regulators with a better measure of individual financial exposure in the event of a derivatives player's bankruptcy.

Netting also allows banks to hold capital against the amount of exposure

to specific counterparties, rather than against the total amount of derivatives.

If, for instance, a bank holds one contract that benefits from higher interest rates, and one that benefits from falling rates, the bank's capital only has to cover the difference between the contracts, which can be substantially lower than the nonadjusted 8% capital requirement.

"It may well be worth it for us and others to have access to legal opinions, rather than pay for in-house counsel," said John W. …

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Derivatives Group Talks Up Netting Expertise to Lure Regionals into Fold
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