Collateral Management

CHAPTER 36OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Holding Collateral

This chapter describes the options for firms relating to the holding of collateral received from counterparties, as the legal status of the collateral impacts how the collateral should be held and whether the collateral taker may legally reuse the collateral in a subsequent transaction.

Please note that the contents of this chapter represent the author’s own view of how the documentation produced by the International Swaps and Derivatives Association (ISDA) is normally used by financial institutions and is not an ISDA official guide of how to understand or to complete or to use such documentation. Readers are advised to take their own legal advice regarding the implementation and use of such documentation.

36.1 INTRODUCTION

When a firm is in receipt of collateral (and in particular securities collateral), the way in which the firm holds such collateral can have significant implications.

Note that the primary focus of this chapter is on securities (primarily bond) collateral, which is fungible or interchangeable only within a specific securities issue or ISIN. Conversely, cash is regarded as fully fungible within a particular currency.

In order for the reader to be clear as to the role of each party, within this chapter the following terms will ...