Is Netting a privilege or a right

The European central bank introduced its new process to recognize netting agreements to reduce the risks nearly a year ago and yet could not achieve any promising results. Firms are struggling to meet day to day reporting requirements and failing to consider the need for scalability. The focus on legal opinion rather than on the data supports and allows the application of legal opinions.

Netting is a privilege as it justifies the capital-critical decisions which requires the institutions to recognize the role of data and have a strategic approach to control the framework

ECB’s new netting requirement revealed a lack of data governance with EU institutions. Since 2020 the firms have had to notify ECB when they extended the netting agreements which would require legal opinion to be commissioned.

Firms want to default to legal responses to meet the requirements rather than a constructive response. Netting determinations are made by yes/no indicators with no capturing of of any work at all.

The institutions may continue to determine if a change is material or not according implying that the institution must be able to document for each new agreement whether the core netting provision has been amended or not. Firms are collecting vast amounts of data underpinning business decisions. Essential data capture process have been overlooked due to it. Versions of ISDA Master Agreement, GMRA and GMSL preprints are no longer covered by standard industry opinions.

As it is extremely concerning that the firms are neither looking at the data nor meeting regulatory benefits before netting. Therefore ECB has highlighted a clear shift in regulatory approach in placing the right control framework and recording data to support fundamental netting decisions. Thus netting can’t be regarded as a right rather it’s a privilege and decision to net has to be supported by proof, accurate legal data and an approach to date governance.