A new approach to close-out netting legal opinions in respect of OTC derivatives and securities financing transactions

Akber Datoo, Paul Williams and Rhodri Whiteley
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Akber Datoo: Founder and CEO, D2 Legal Technology, Professor, School of Law, University of Surrey, UK
Paul Williams: PhD student, University of Surrey, UK
Rhodri Whiteley: Undergraduate student, University of Oxford, UK

Journal of Securities Operations & Custody, 2023, vol. 15, issue 3, 260-277

Abstract: Close-out netting has been, and remains, crucial to the success of capital markets transactions such as OTC derivatives. A key credit risk mitigant, it has significant regulatory capital impact for prudentially regulated financial firms if they have obtained reasoned legal opinions confirming the enforceability of the close-out provisions of the relevant master trading agreement. These legal opinions are, however, complex and extremely nuanced, resulting in excessive costs in reviewing and (sometimes incorrect) application of the advice they provide. This paper considers the inherent challenges in the review and application of these legal opinions and whether they could perhaps be partly expressed in formal logic to address these challenges.

Keywords: close-out netting; ISDA; legal opinions; regulatory capital; automation; derivatives (search for similar items in EconPapers)
JEL-codes: E5 G2 K22 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:aza:jsoc00:y:2023:v:15:i:3:p:260-277

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