Where a firm has a live and current OTC derivative trade (or position) with a particular counterparty, at any point during its lifetime that trade or position may be subject to an unwind.
Unwinds arise where both parties mutually agree to exit the trade. The specific characteristic of this method of exiting a contract from a particular firm’s perspective is that it is the execution of an opposing trade to the existing trade, carried out with the same counterparty, the effect being to close (or to square-off) the original trade resulting in no outstanding trade and no ongoing exposure. This situation is depicted in Figure 39.1, which shows both the pre-unwind and post-unwind situation:
- Party A has no ongoing contract and therefore no exposure with Party B
- Party ...