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Key provisions of the international deposit netting agreement

Tiderman, Grace (2011) JURM01 20111
Department of Law
Abstract
This thesis will examine the provisions of the International Deposit Netting Agreement (IDNA), published by the British Bankers’ Association in 1996. The thesis takes the perspective of an eligible party to the agreement and analyses the interpretations of the agreement. There is a limited amount of documentation available regarding the interpretation of the IDNA, wherefore all thoughts and conclusions are those of the writer’s, except where a particular source is referred to.

The IDNA sets out the contractual framework for banks to off set deposits taken by a bank from a counterparty, against deposits placed with the same counterparty bank, in the situation of a specified event of default. By entering into such an agreement, banks... (More)
This thesis will examine the provisions of the International Deposit Netting Agreement (IDNA), published by the British Bankers’ Association in 1996. The thesis takes the perspective of an eligible party to the agreement and analyses the interpretations of the agreement. There is a limited amount of documentation available regarding the interpretation of the IDNA, wherefore all thoughts and conclusions are those of the writer’s, except where a particular source is referred to.

The IDNA sets out the contractual framework for banks to off set deposits taken by a bank from a counterparty, against deposits placed with the same counterparty bank, in the situation of a specified event of default. By entering into such an agreement, banks which operate in the cash markets have the possibility of reducing their counterparty risk and systemic risk through the method of deposit netting.

The essence is that banks agree bilaterally that deposits and interbank loans will be covered by a close-out agreement. In an event of default by one of the parties, for example failure of payment or insolvency, the party will immediately pay a net figure to the other party and this single figure replaces the old individual loans and deposits. This process will be discussed to a further extent in chapters 1.2 and 3.4.2.

The main advantage with deposit netting is that when an event of default occurs it reduces credit and liquidity risks for the parties. A further advantage is that a party becomes safe from so called “cherry picking” where banks (the parties to the agreement) with multiple counterparties pick and choose which agreements to honour or prioritise in an event of default. Cherry picking will be discussed in chapter 3.4.2.

In the light of credit and liquidity risk, the IDNA apparently becomes very relevant in the case of insolvency. Identifying and understanding insolvency issues will therefore constitute a reasonably central part of this paper. Since the agreement is triggered by an event of default and most commonly insolvency, this is very relevant to the application and interpretation of the IDNA.

The paper discusses the legal aspects of set off and netting abroad, for example; what would happen if a party becomes insolvent and its’ deposits are held in a jurisdiction where the insolvency administrator is permitted to pick and choose between different agreements. Or what would happen if that jurisdiction does not recognise deposit netting all together. Furthermore, the provisions of the courts will be examined as to how far these reach. For example, a court in England and Wales may apply the laws of a different jurisdiction to the insolvency of an entity. More so, the implications of what will happen to any held deposits when a company becomes liquidated or wound up as a result of an event of default. How will such actions affect the deposit obligations involved? What guidance does the IDNA give in such case? (Less)
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author
Tiderman, Grace
supervisor
organization
course
JURM01 20111
year
type
H3 - Professional qualifications (4 Years - )
subject
language
English
id
1852343
date added to LUP
2011-03-14 11:34:21
date last changed
2011-03-14 11:34:21
@misc{1852343,
  abstract     = {This thesis will examine the provisions of the International Deposit Netting Agreement (IDNA), published by the British Bankers’ Association in 1996. The thesis takes the perspective of an eligible party to the agreement and analyses the interpretations of the agreement. There is a limited amount of documentation available regarding the interpretation of the IDNA, wherefore all thoughts and conclusions are those of the writer’s, except where a particular source is referred to. 

The IDNA sets out the contractual framework for banks to off set deposits taken by a bank from a counterparty, against deposits placed with the same counterparty bank, in the situation of a specified event of default. By entering into such an agreement, banks which operate in the cash markets have the possibility of reducing their counterparty risk and systemic risk through the method of deposit netting.

The essence is that banks agree bilaterally that deposits and interbank loans will be covered by a close-out agreement. In an event of default by one of the parties, for example failure of payment or insolvency, the party will immediately pay a net figure to the other party and this single figure replaces the old individual loans and deposits. This process will be discussed to a further extent in chapters 1.2 and 3.4.2. 

The main advantage with deposit netting is that when an event of default occurs it reduces credit and liquidity risks for the parties. A further advantage is that a party becomes safe from so called “cherry picking” where banks (the parties to the agreement) with multiple counterparties pick and choose which agreements to honour or prioritise in an event of default. Cherry picking will be discussed in chapter 3.4.2.

In the light of credit and liquidity risk, the IDNA apparently becomes very relevant in the case of insolvency. Identifying and understanding insolvency issues will therefore constitute a reasonably central part of this paper. Since the agreement is triggered by an event of default and most commonly insolvency, this is very relevant to the application and interpretation of the IDNA.

The paper discusses the legal aspects of set off and netting abroad, for example; what would happen if a party becomes insolvent and its’ deposits are held in a jurisdiction where the insolvency administrator is permitted to pick and choose between different agreements. Or what would happen if that jurisdiction does not recognise deposit netting all together. Furthermore, the provisions of the courts will be examined as to how far these reach. For example, a court in England and Wales may apply the laws of a different jurisdiction to the insolvency of an entity. More so, the implications of what will happen to any held deposits when a company becomes liquidated or wound up as a result of an event of default. How will such actions affect the deposit obligations involved? What guidance does the IDNA give in such case?},
  author       = {Tiderman, Grace},
  language     = {eng},
  note         = {Student Paper},
  title        = {Key provisions of the international deposit netting agreement},
  year         = {2011},
}