Market Review of OTC Derivative Bilateral Collateralization Practices
by the ISDA Collateral Steering Committee
March 1, 2010
Abstract: The UK Financial Services Authority on behalf of the international group of OTC derivative supervisors asked ISDA in October 2009 to conduct a broad market review of bilateral collateralization practices for OTC derivatives to facilitate better understanding of current market practice, especially as it relates to the different types of counterparties active in the market.
The objective of the review is to enable a more complete appreciation of the use of collateral as a credit risk mitigant across the diverse OTC derivative market, including (generically) the motivations, capabilities, limitations, and typical practices of market participants engaging in collateralization. While the dealer segment of the market is the largest and most systemically significant subset of market participants and has received a high degree of scrutiny and analysis in recent times, there is an interest in developing a similarly complete view of collateral in the wider market from a credit risk mitigant perspective. This review will facilitate the assessment of whether any systemic risks exist, and if so, whether any reforms to collateral practice should be implemented to address any such risk in any segment of the market.
Related reading: ISDA.org : Collateral