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significant stress on the use of netting agreements. The OCC
also encouraged the use of netting agreements. As part of the
credit approval function, the OCC expected credit officers to
assess the availability and impact of credit exposure reduction
techniques such as netting.
Pursuant to BC-277:
In order to reduce counterparty credit exposure, a
national bank should use master close-out netting
agreements with its counterparties to the broadest
extent legally enforceable, including in any possible
insolvency proceedings of such counterparties. * * *
* * * * * * *
The advantages of such netting arrangements include a
reduction in credit and liquidity exposures, the
potential to do more business with existing
counterparties within existing credit lines, and a
reduced need for collateral to support counterparty
obligations. * * *
3. Status of Netting Arrangements
Before 1990, prior law arguably allowed a U.S. bankruptcy
trustee or liquidator either to accept or to repudiate individual
contracts among a portfolio of financial derivatives, depending
on their profitability to the bankrupt party. The trustee or
liquidator could arguably enforce only those swaps that had
positive value.
In 1990, Congress amended then 11 U.S.C. section 362(b)(14)
(now section 362(b)(17) (2000)) and added to the Bankruptcy Code
11 U.S.C. section 560 to limit a bankruptcy trustee’s avoidance
powers. These sections exempted swap agreements from the
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