Risk Protection Measures for the Bank Essay Example | Topics and Well Written Essays - 1500 words

Risk Protection Measures for the Bank - Essay Example Bank A may have the option to propose an early termination date in order to avoid further losses (FN3). However the contract between the two banks should make provision for such losses and one of the best options open to Bank A is to enter into an ISDA Agreement. An ISDA Agreement allows a bank to operate in financial markets while conforming to strict regulations. The EU Directive 2001/24/EC dated 4 April 2001 has laid out specific guidelines on the winding up of credit institutions and will apply to both bank A and Bank A who are in Europe. (a) Article 25 specifically clarifies that netting agreements will be solely governed by the nature of the agreement that exists between the two parties – Bank A and B. Therefore, Bank A can cope with the risks by introducing appropriate clauses into the Schedule to the ISDA agreement. If Bank A has any intimation of the potential winding up of Bank B and then enters into any financial arrangements with them, recoveries will be limited, despite any risks. However, if at the time of entering the agreement, Bank A is not aware of any winding up, then financial obligations due to it from Bank B may be secured through the means outlined below. Derivatives are financial instruments that are used for financial speculation and their fluctuating value is caused by volatility in the financial markets1. Counterparties enter into derivatives for purposes of hedging and arbitrage to be derived in financial transactions through the management of asset liabilities2. Contractual provisions under ISDA Agreements include a Master Agreement which is standard all contracting organizations and an attached Schedule may be tailored according to the requirements of the two parties. Therefore, Bank A can tailor the Schedule by including a clause that will also regulate oral trading arrangements of the two parties.