2) Why do we need to negotiate ISDA and CSA Master Agreements?
- Single agreement: Section 1(c) states that all transactions are entered in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties
- 3 levels of netting:
Payment netting: netting of payments which are in the same currency, for the same transaction and payable on the same date (Section 2(c))
Close-out netting: as a consequence of the single agreement principle, in a close-out situation, the values of all transactions between the parties are calculated and netted off against each other so as to produce a single figure payable one way or the other
-> First scenario: two gross exposures with Bank A owing EUR 1000 gross to Bank B vs. Bank B owing EUR 400 gross to Bank A
-> Second scenario: Bank A’s actual exposure to Bank B : EUR 600 net
=> Bank A’s risk over Bank B has been reduced thanks to the close-out netting mechanism