The financial and legal world is quite complex. Cross-border financial transactions among entities are commonplace, resulting in entities having multiple financial exposures with others around the world. This can be difficult to manage and can lead to many problems. For example, a financial institution may have large intra-day foreign exchange settlement obligations with a number of different trading partners. A large financial institution may have millions of dollars of exposure to their largest counterparties on any given day. Entities may also have large exposures based on counterparty credit risk and liquidity risk. Many entities enter into agreements to manage and control these exposures.
When trading partners agree to offset their positions or obligations, they are “netting”. By doing so, they reduce a large number of individual positions or obligations to a smaller number of positions or obligations, and it is on this netted position that the two trading partners settle their outstanding obligations. Besides reducing transaction costs and communication expenses, netting is important because it reduces credit and liquidity risks, and ultimately systemic risk.
Netting agreements have been used to manage these exposures in a number of different contexts. Netting agreements are a contractual mechanism to offset payables against receivables to reduce an entity's exposure to a counterparty. Netting agreements are used, for example, to reduce credit exposure to the net obligation of a counterparty. The enforceability and use of netting agreements varies by jurisdiction. For example, in the United States, netting in bankruptcy or insolvency is enforceable under the federal bankruptcy code. Netting between United States-based counterparties is permitted by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Different jurisdictions have different rules and laws regarding the use and enforceability of netting agreements. This can make it quite difficult for an entity to manage credit and exchange risk with any certainty. Frequently, an opinion of counsel regarding the legality of a particular netting relationship is required for each jurisdiction, and often for each netting agreement.
It would be desirable to provide a system which allows the analysis of netting agreements. It would further be desirable to provide a system which allows the automated analysis of netting agreements. It would further be desirable to provide a system which allows a number of issues associated with agreements to be analyzed based on the particular fact pattern of each agreement. It would further be desirable to provide a system which allows the analysis of agreements and which allows updating of netting positions between parties.