27

14

 

John Wiley & Sons, Inc. (Visit publisher website)

2007

English

 

 

 

Basic

 

 

Risk management, regulatory and legal issues, legal risk, ISDA master netting agreement, legal risk with derivatives, netting, Basel Accord and netting, walk-away clauses, Sarbanes-Oxley Act, Enron, WorldCom, Global Crossing, legal terms, bankruptcy terms, contract terms

 

*** Excerpt from book *** This chapter will focus on legal risk for derivatives, although many of the concepts developed here also apply to legal risks for other financial instruments, such as loans or bonds. Section 27.1 briefly reviews the history of legal risks in the derivatives markets. Section 27.2 discusses netting, an important feature of swaps that has been developed to control market, credit, and legal risk. Section 27.3 summarizes the master netting agreement established by the International Swaps and Derivatives Association (ISDA) in 1992. Readers, however, should also read the full text of the agreement. The legal environment has drastically changed in the wake of corporate scandals such as Enron and WorldCom. This has led to new regulations that apply to all public companies listed on U.S. exchanges. Section 27.4 presents the main provisions of the Sarbanes-Oxley Act, which aims at strengthening firm-wide risk management practices. Finally, Section 27.5 contains a glossary of useful legal terms.

 

27.1 Legal Risks with Derivatives 597
27.2 Netting 600
27.2.1 Netting under the Basel Accord 601
27.2.2 Walk-Away Clauses 602
27.2.3 Netting and Exchange Margins 602
27.3 ISDA Master Netting Agreement 603
27.4 The 2002 Sarbanes-Oxley Act 606
27.5 Glossary 608
27.5.1 General Legal Terms 608
27.5.2 Bankruptcy Terms 608
27.5.3 Contract Terms 609
27.6 Answers to Chapter Examples 610

 

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