Collateral and OTC derivatives

Size is too simple a metric… It really doesn’t matter from a systemic point of view whether you have four banks or forty banks in a blogmarket. It’s the system’s asset concentration – principally in government debt and in mortgage debt – that can be dangerous.”

Sometimes it’s always good to keep brushing yourself, thought of sharing some important glossary on the OTC Market as I was refreshing self on last night:

  • Back loading: The action of clearing already existing bilateral OTC derivatives positions.
  • Collateral management : Typically, two parties enter into an OTC transaction under an Agreement (ISDA framework mainly) that specifies the contractual relationship between the two parties. As part of this Agreement, a specific document (Credit Support Annex/Deed under the ISDA framework) stipulates that some collateral will be exchanged between them to mitigate counterparty risk. Collateral, in the form of cash or securities, is mainly exchanged on the basis of the variation in the value of the exposure between the parties (value of all OTC contracts under the Agreement). This is often referred to as Variation Margin. In addition, Independent Amounts can be requested by one of the parties.

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