Insolvency Close-Out Netting
7 Pages Posted: 4 Nov 2020
Date Written: September 13, 2020
This short paper, prepared for a colloquium on the Resolution of Financially Distressed Financial Institutions, explains insolvency close-out netting and its implications. The term refers to a special type of netting of offsetting derivatives obligations that entitles a derivatives counterparty, upon the occurrence of a bankruptcy or default relating to the other party, to terminate outstanding obligations and reduce the amounts mutually owing between the parties to a net amount. Although the purported goal of that netting is to reduce systemic risk, this paper critically analyzes the extent to which that occurs.
JEL Classification: G28, F38, K23
Suggested Citation: Suggested Citation