This thread arises from some of the other threads I have posted...I have been asking about CP risk management for OTC derivatives and I have received conflicting comments...1. Are downgrade options and CSA present in all OTC deriv? 2. How often are bilateral collat arrangements monitored and enforced (how does this even work in the absence of a clearing house fom which to debit/credit collateral)?3. When a CP is nearing insolvency, what happens? First downgrade options kicking in, then collateral used to cover exposure and remaining exposures netted? Help!4. Netting is a mechanism that is outside the interference of a liquidator/administrator of an insolvent's estate...which means that any net exposure oblig are ranked above normal creditor claims right? Or are they on the same level of priority of payment as normal unsecured creditors?

QuoteOriginally posted by: michaelcwmanThis thread arises from some of the other threads I have posted...I have been asking about CP risk management for OTC derivatives and I have received conflicting comments...1. Are downgrade options and CSA present in all OTC deriv? 2. How often are bilateral collat arrangements monitored and enforced (how does this even work in the absence of a clearing house fom which to debit/credit collateral)?3. When a CP is nearing insolvency, what happens? First downgrade options kicking in, then collateral used to cover exposure and remaining exposures netted? Help!4. Netting is a mechanism that is outside the interference of a liquidator/administrator of an insolvent's estate...which means that any net exposure oblig are ranked above normal creditor claims right? Or are they on the same level of priority of payment as normal unsecured creditors?1. No, downgrade options and CSAs are not present in all OTC derivatives.2. It depends, could be daily, weekly, monthly....they could be triggered by events as well.3. It depends, maybe nothing could happen when a CP nears insolvency. Downgrades don't always occur before a CP defaults. Under CSA, default usually means failure to deliver collateral.4. You'd have to speak with a workout guy/Asset Recovery specialist and/or a lawyer for that....

As a matter of interest, I know that from what I have covered on the law of netting is that some jurisdictions do not recognise the concept of netting...netting is a new concept in law that nets the exposure of parties to derivative contracts, but in some jurisdictions this conflicts with their domestic insolvency regime. If this is the case, then what happens is that the insolvency administrator (i.e. the person taking over from insolvent) can 'cherry-pick' the enforcement of outstanding contracts, so that the admin. only seeks to enforce contracts that will result in money owed to the insolvent and not enforce contracts the insolvent owes to others. One can see that netting is by its nature incompatible with this...but since netting is very useful and now the standard for netting deriv exposure, juris have been forced to introduce legislation specifically for this matter and alter their insolvency regime; it is in fact a condition for European-accession countries before they can become part of the EU, and I believe Hungary has either passed legislation to this effect or is in the process of doing so...In return for all the help I have received from contributors to my thread, I will occasionally post some legal comments from issues arising from quant finance, hope you guys find this interesting (this is my living!)...What do you guys think about this netting problem?