Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 12 bona fide third parties or reasonably expected to be available in the market under a replacement contract for each such transaction. It is a best practice to include adequate cross-default or cross-acceleration clauses for an added measure of credit protection. These clauses are meant to trigger a request for collateral and/or a termination event. Thus if a counterparty has a financial problem, as exemplified by a default to a third party, this clause could provide the nondefaulting party sufficient time to reduce or eliminate potential losses. Most cross-default or cross-acceleration provisions are tied to indebtedness for borrowed money or defaults under other trading agreements, although this should be carefully evaluated for each counterparty. Master Netting Agreements Another significant means of mitigating credit risks is through the execution of master netting agreements, which govern all transactions under the various financial and physical master agreements selected by the counterparties. Master netting agreements provide for close-out netting across products and a single termination payment upon close-out of the underlying transactions. Some master netting agreements also provide for cross-product margining by including credit support terms that net the exposures across all underlying financial and physical master agreements. EEI has, in concert with the industry, developed a standard master netting agreement. This agreement provides for single-entity cross-product netting, as well as cross-product margining through an accompanying credit support annex. The EEI master netting agreement was formally introduced to the industry in the third quarter of 2002. In addition, EEI also developed a standard master netting agreement that provides for close-out set-off only without margining. Both of these documents were accompanied by a landscape describing some of the legal issues that users and their counsel should consider when structuring such arrangements. The industry continues to discuss a broader application to allow for cross-product netting across affiliate groups. (See further discussion in Section VI.) Some legal issues raised by the use of master netting agreements remain untested, but many of the same benefits can be achieved through careful selection of cross-default, cross-acceleration, set- off, and collateral provisions in the separate master agreements discussed above. Currently, structured product transactions tend to be documented separately from standard product trading, even if the commodity or product could be transacted under one of the other master contracts already discussed. The reasons for this include the term, length, size, and purpose of the transaction. All the same points outlined above remain critical in constructing the credit terms for a structured transaction. We recommend using one of the contracts we have discussed, making the product master agreement transaction specific for the structured transaction. If other documentation is used, it would be beneficial to use terms, rules, and procedures with respect to credit that are generally incorporated in industry standard master contracts.