CHAPTER 40OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Offset

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.


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:

FIGURE 40.1 Pre-offset and post-offset situation

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