Margining OTC positions
The OTC positions can give rise to a situation where one or other party
is winning and one losing. An obvious answer is to margin the losing
position, but given that it is a negotiated rather than a standardised
product that is easier said than done.
Collateral management of OTC exposures and risks is a complicated
business governed by various issues like credit ratings of the two par-
ties, suitable and agreeable margin system or basis and acceptable
collateral. However, given the counterparty risk that exists it is still
hugely important to negotiate and agree any applicable margin terms
at the time of the trade.
Summary
Margin and collateral are not only core elements of undertaking
derivative activity, but also fundamental risk control tools.
Efficient use of collateral, i.e. does a fund manager use cash or
assets to cover margin calls, what are the relevant charges and funding
costs, what can/does a broker want to use or take as collateral etc. are
all key business issues and will impact in terms of profitability and
returns on derivatives activity.
Margin and collateral 141
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