Bank A is a US Bank. 12 CFR Part 3 states that Bank A can only calculate exposure on a net basis if derivatives transactions are governed by a “qualifying master netting agreement”. If not, exposures must be calculated gross – significantly increasing capital usage.
12 CFR 3.3(d) states that “In order to recognize an agreement as a qualifying master netting agreement…a national bank or Federal savings association must:
- Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that: (i) The agreement meets the…definition of qualifying master netting agreement…; and (ii) In the event of a legal challenge…the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
- Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of qualifying master netting agreement.”
Performing and maintaining up-to-date netting opinion reviews is a very time-consuming and resource-intensive exercise for Bank A – preventing it from allocating valuable resource elsewhere.
Fortunately, with Ark 51, Bank A can automate and streamline the entire process.
Ark 51 provides, in a user-friendly format, the “well-founded” legal review of netting and collateral opinions which Bank A requires. Moreover, its in-built sign-off module automatically generates the audit trail demanded by 12 CFR 3.3(d).
Using the AI-powered data extraction capabilities of Ark 51’s document repository, Bank A can rapidly confirm that agreements satisfy the requirements of a “qualifying master netting agreement” and that they would be valid, binding and enforceable in the event of legal challenge.
Blending the information extracted from executed documentation with opinion data, Ark 51’s netting engine allows Bank A to go a step further – making real-time, automated, dynamic netting determinations for all of Bank A’s counterparties. A process that was once a regulatory millstone becomes entirely automated. Internal resource is released to focus on high-value risk issues, compliance is enhanced and balance sheet usage is reduced. The savings generated are many times Bank A’s investment in Ark 51.