CHAPTER 40OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Offset
40.1 INTRODUCTION
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 offset.
Offsets arise where one of the parties to a trade chooses to exit that 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 a different counterparty (to the original trade), the effect being to close overall exposure due to a zero overall position; however, exposure remains with both the original counterparty and the new counterparty. This situation is depicted in Figure 40.1, which shows both the pre-offset and post-offset situation:
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