Collateral Management

CHAPTER 34OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Receiving Margin Calls

This chapter lists and describes the various steps involved in a firm receiving a margin call from a counterparty, and the subsequent tasks necessary to mitigate the counterparty’s exposure, without incurring risk for the firm. The processing steps for both cash collateral and bond collateral are described, as there are significant differences in the use and ongoing administration of such collateral forms.

34.1 INTRODUCTION

At this point in the collateral lifecycle, a firm should have completed (for each counterparty):

• portfolio reconciliation
• marking-to-market
• calculation of exposure amount, taking account of:
  • CSA components
  • existing collateral given or taken, including collateral in transit

in order to derive the firm’s view as to whether an exposure exists, and accordingly whether a margin call is to be 1) made by the firm on the counterparty, or 2) made by the counterparty on the firm.

Assume that the firm’s calculations show that the counterparty is the exposed party, and thus the firm is anticipating receipt of a margin call notification from the counterparty. Should the firm receive such a communication, and by the required deadline, and providing the firm agrees its contents, the firm will need to decide either to pay cash collateral ...