Collateral Management

CHAPTER 33OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Exposure Calculation

This chapter explains the critical process of identifying whether an exposure exists, and whether the exposure is callable by the firm on its counterparty, or vice versa.

33.1 INTRODUCTION

At this point in the collateral lifecycle, a firm should have 1) performed portfolio reconciliation with its various counterparties, and 2) completed the mark-to-market process.

A number of components comprise the determination of:

1. whether an exposure exists ‘today’, and if so:
2. the party that is exposed (whether the firm itself or its counterparty), leading to:
3. issuance of a margin call by the exposed party.

The first two of these points are explored within this chapter, whilst the third point will be covered within the following two chapters.

33.2 CREDIT SUPPORT ANNEX

For OTC derivatives, each Credit Support Annex (CSA) that a firm has with its various counterparties is likely to contain details that, if not unique from one another, differ in many aspects. It is therefore essential that, for exposure calculation purposes, a firm ensures it utilises the exact information contained in the relevant CSA for each of its counterparties. For details comprising the CSA, please refer to Chapter 22 ‘OTC Derivatives and Collateral – Legal Protection – Credit Support Annex’. ...