Netting and Offsetting: reporting derivatives under US GAAP and under IFRS

1. Reporting net vs gross For netting/ offsetting of assets and liabilities also result in significant differences in banks total assets, posing problems for framing an international leverage ratio.

2. Fundamental concepts: netting, offsetting an set-off 2.1. Set -off: 2.1.1.Derecho legal: 2.1.1.1. regulacin 2.1.1.2. contractualmente 2.1.2.por medida de fuerza de: 2.1.2.1. fuerza de las condiciones del contrato 2.1.2.2. por bancarrota 2.2. Netting: 2.2.1.Acuerdos de neteo: contrato simple entre dos partes bajo el cual todas las transacciones puede ser neteadas o compensadas entre ambos. 2.2.2.Se aplica con sistema de confirmacin 2.2.3.Concepto fundamental que distingue a los derivados de cualquier otro tipo de garanta deuda u otro instrumento financiero 2.2.4.Es la terminacin o cancelacin reciproca de las obligaciones, la valuacin o terminacin de las obligaciones y su reemplazo por una nica obligacin de pago. 2.2.5.Principales casos que toma el netting: 2.2.5.1. Proceso de neteo o pago de neteo (settlement netting) : ocurre en el transcurso normal del negocio en marcha en una empresa solvente e incluye la combinacin de la compensacin del flujo de caja de las obligaciones entre dos partes en un dia acordado en una moneda pactada en un nico proceso de pago o de cobro. En este caso es lo mismo que el set-pff. El pago es opcional puede ser solo a nivel de presentacin o provision. 2.2.5.2. Compensacin anticipada: es la cancelacin de contratos no cumplidos siendo sustituidas por la obligacin de una parte de pagar a la otra una suma neta nica, que representa la diferencia entre el clculo actual del valor de las obligaciones de las dos partes.Aplicable en casos de default. 2.2.5.2.1. Close-out-netting tres pasos: 2.2.5.2.1.1. Terminacion: la parte afectada por el default pone trmino a la obligacion del acuerdo 2.2.5.2.1.2. Valuacion: proceso de determinar el reemplazo del costo de cada transaccion 2.2.5.2.1.3. Determinacion del balance neto: neteo de los valores positivos (que se adeudan a la empresa afectada) +/- valores negativos (adeudados por la empresa afectada) para concluir en una nica suma

3. Offsetting: 3.1. Concepto utilizado por contabilidad y para efectos de reporte nicamente, presentacin neta en los registros financieros de activos y pasivos con la intencin de mostrar la posicin legal de la empresa (set-off) 3.2. A risk managment tool 3.3. Existing offseting models

4. Why are derivatives different? 5. How derivatives are managed 5.1. Main charateristics 5.1.1.Obligor risk 5.1.2.Counterparty credit risk 5.1.2.1. The buyer takes the risk that the seller (usually a bank) may default 5.1.2.2. The seller takes the risk that the buyer may default on the contract 5.1.3.Collateral posting (garantia) 5.2. Potfolio management 5.3. Cash flows 6. The efficacy of netting and collateral as risk mitigation techniques 6.1. Systematic risk 6.2. Volatility 6.3. Liquidity and collateral 7. Two different accounting models 7.1. Scope: (ambito de aplicacion) 7.1.1.Offsetting primarily affects financial instruments that are subject to a master netting agreement and include:

8. OTC derivatives 9. Repurchase and reverse repurchase agreements 10. Exchange-traded derivatives, wich are those derivatives that are traded on or novated into an exchange 10.1. The IFRS offsetting model.2 principios : 10.1.1. A currently enforceable legal right to offset 10.1.1.1. Must not be contingent on a future event 10.1.1.2. Must be legally enforceable oin all of the following circunstances: 10.1.1.2.1. The normal course of business 10.1.1.2.2. The event of default 10.1.1.2.3. The event of insolvency or bankruptcy, of the entity and all of the counterparties 10.1.2. An intent either to settle net or simultaneously 10.1.2.1. Financial assets and financial liabilities eligible for set-off are submitted at the same point in time for processing 10.1.2.2. Once the financial assets and financial liabilities are submitted for processing, the parties are committed to fulfil the settlement obligation 10.1.2.3. There is no potential for the cash flows arising from the assets and liabilities to change once the have been submitted for processing (unless the processing fails ) 10.1.2.4. Assets and liabilities that are collateralized With securities will be settled on a securities transfer or similar system (delivery vs payment) so that if the transfer of securities fails, the processing of the realted receivable or payable for which the securities are collateral will also fail (and viceversa) 10.1.2.5. Any transactions that fail, as outlined in the previous, will be re-entered for processing until they are settled 10.1.2.6. Settlement is carried out through the same settlement institution (bank , a central bank or a central securities depository)

10.1.2.7. An intraday credit facility is in place that will provide sufficient overdraft amounts to enable the processing of payments at the settlement date for each of the parties, and it is virtually 5 ertain that the intraday credit facility will be honoured if called up. 10.1.3. The US Gaap offsetting modelconditions 10.1.4. Differences between IFRS and US Gaap: (pp 27) 10.1.4.1. The existing exception for derivatives in relation to the intent criterion 10.1.4.2. The conditional right to set-off (under a master netting agreement) criterion under US Gaap

10.1.5. Specific application guidance (pp28)

10.1.6. Advantages and disadvantages (pp34) 10.1.6.1. Generation of future cash flows 10.1.6.2. Credit risk 10.1.6.3. Liquidity risk

11. Common offsetting disclosures 11.1. Scope: facilitate comparison between those entities that prepair their financial statements 12. Disclosures (pp31)

13. Un-weighted leverage ratio: total tier 1 capital to total un-weighted asset of a least 3 per cent. 13.1.1. The ratio is computed using the existing Basel II netting requeriments largely because accounting offsetting rule currently differ significantly between jurisdiction