2. Commenters widely welcomed the Committee's proposal to allow the bilateral netting of certain transactions covered by Annex 3 of the Capital Accord for capital adequacy purposes, provided certain conditions are met. The Committee received no major comments which would have caused it to alter these conditions in any fundamental way.

3. Many of the comments concerned administrative issues related to satisfying the legal and procedural conditions in the proposal. For example, some wished for the Committee to specify exactly what is expected for satisfactory legal opinions and for adequate internal review procedures. Others wished for the Committee to publish a list of acceptable netting documents.

4. Under the amendment the primary burden rests on banks to demonstrate to their supervisors the legal enforceability of netting arrangements in all relevant jurisdictions. In this regard, the Committee has decided to leave to national discretion the development of any guidelines or procedures banks must follow. The Committee will not publish a list of acceptable agreements. In the implementation of the amendment, however, the Committee will be sure to promote consultation among and between national supervisors to facilitate monitoring of adherence to the specified conditions.

5. The April 1993 proposal stated that netting agreements containing walkaway clauses would not be recognised for capital adequacy purposes. Some commenters sought an additional transition period or a grandfathering of agreements containing such clauses. The Committee feels that its views on walkaway clauses have been known to the industry for some time and therefore that no additional transition period or grandfathering is warranted.

6. Under the amendment banks using the current exposure method are permitted to net the current exposure associated with covered transactions, but there is only very limited scope allowed for netting notional amounts for the purpose of calculating add-ons for potential future exposure. For the reasons explained below, the Committee is proposing a formula to recognise netting effects in the calculation of add-ons for potential future exposure. However, the Committee does not wish to delay any longer the netting of current exposure, and that is the purpose for now issuing this amendment to the Capital Accord. The Committee will later modify the Capital Accord to reflect the results of the consultation process on the netting of potential future exposure and the expanded add-ons matrix.

7. Finally, banks using the original exposure method may apply lower credit conversion factors to obtain supervisory benefit for netting arrangements which satisfy the stated requirements. However, this will only be permitted until market risk-related capital requirements are implemented, at which time the original exposure method will cease to be available for banks supervised according to the Capital Accord².

² Where appropriate, an additional transition period up to 12 months will be permitted.