An entity that undertakes a number of financial instrument
transactions with a single counterparty may enter into a 'master
netting arrangement' with that counterparty – see, for
example,
CFM11050 regarding the ISDA Master
Agreement for swaps and similar derivatives.
Such an agreement provides for a single net settlement of all
financial instruments covered by the agreement in the event of
default on, or termination of, any one contract. These arrangements
are commonly used by financial institutions to provide protection
against loss in the event of bankruptcy or other circumstances that
result in a counterparty being unable to meet its obligations.
A master netting arrangement commonly creates a right of
set-off that becomes enforceable and affects the realisation or
settlement of individual financial assets and financial liabilities
only following a specified event of default or in other
circumstances not expected to arise in the normal course of
business. A master netting arrangement does not provide a basis for
offsetting unless both of the criteria in
CFM16335 are satisfied. When financial
assets and financial liabilities subject to a master netting
arrangement are not offset, the effect of the arrangement on an
entity's exposure to credit risk is disclosed.
