Collateral Management

CHAPTER 27OTC Derivatives and Collateral – The Collateral Lifecycle – Trading – Trade Execution

The Trading section of the OTC Derivative Collateral Lifecycle covers the single activity of trade execution, which should ideally be performed only after pre-trading activities have been completed.

This chapter provides an overview as to how OTC derivative trades are executed, and the associated risks. From a collateral management perspective, trades executed accurately will result in a solid foundation from which exposure calculations and margin calls can be made successfully.

From the perspective of any firm, the act of trade execution and the closely associated process of trade capture are absolutely critical to be performed accurately and in a timely fashion, in order for subsequent trade processing and collateral processing to be managed in an efficient and risk-free fashion.

27.1 TRADE EXECUTION: INTRODUCTION

Trade execution: the act of buying or selling (or lending and borrowing) a financial product, is performed at the very start of the processing lifecycle of an individual trade, including trades in OTC derivative products.

Trade execution is the responsibility of the firm’s OTC derivative traders. OTC derivative trades have historically been executed directly between the two firms and are said to be ‘privately negotiated’ or traded on a ‘bilateral’ basis. ...