CHAPTER 35OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Issuing Margin Calls

The figure shows the OTC derivative collateral lifecycle. It consists of a series of logical and sequential steps which should be experienced in order for a firm to process repo trades in a safe and secure fashion. The steps are as follows:
Step 1: Pre-Trading.
Step 2: Trading.
Step 3: Post-Trading.
Step 4: Throughout Lifetime of Trade. 
Step 5: Trade Termination.
This stage of diagram depicts the Throughout Lifetime of Trade.

35.1 INTRODUCTION

By this stage in the collateral lifecycle, the following should have occurred. Note that these tasks are common to both receiving a margin call and making a margin call:

  • portfolio reconciliation
  • marking-to-market
  • calculation of exposure amount, taking account of:
    • CSA components, per counterparty
    • existing collateral given or taken.

In fact, all the above-mentioned tasks are essential in determining the monetary value of an exposure, and which party is exposed and therefore which party should make the margin call.

Under the circumstances where the firm has established that it has an exposure, the mitigation of that exposure is achieved by the procedural steps depicted in Figure 35.1

The figure shows the issuing of a margin call by the procedural and sequential steps. The steps are as follows: 
Issuing a Margin Call
Step 1: Issuing a Margin Call Notification.
Step 2: Proposed Collateral by Counterparty.
Step 3: Verifying the Counterparty’s Proposed Collateral.
Step 4: Transaction Capture.
Step 5: Actioning Receipt of Incoming Collateral.
Step 6: Monitoring Receipt of Collateral.
Step 7: Updating Books & Records.
Step 8: Performing Reconciliation.
Step 9: Updating Records of Cumulative Collateral.

FIGURE 35.1 Issuing a margin call: sequential tasks

35.2 ISSUING A MARGIN CALL NOTIFICATION

The firm’s ...

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