What Role Does Collateral Play in Mitigating OTC Counterparty Risk? ⎊ Path

What Role Does Collateral Play in Mitigating OTC Counterparty Risk?

Collateral, typically in the form of cash or highly liquid securities, is exchanged between OTC counterparties to secure the derivative exposure. This collateral acts as a financial buffer, ensuring that if one party defaults, the non-defaulting party can seize the collateral to cover any losses.

Regular exchange of this collateral, known as variation margin, ensures that the exposure is covered in real-time, drastically reducing the potential loss from a counterparty default.

Why Is Variation Margin Typically Paid in Cash, While Initial Margin Can Be Non-Cash Collateral?

What Is the Difference between Initial Margin and Variation Margin (Maintenance Margin)?

What Happens to the Variation Margin Received by the Clearing House?

How Does an ‘Initial Margin’ Requirement Differ from a ‘Variation Margin’ Call?

How Does Variation Margin Differ from Initial Margin in Mitigating Counterparty Risk?

Does Variation Margin Apply to Options Contracts in the Same Way as Futures?

Differentiate between Initial Margin and Variation Margin

What Is the Difference between Initial Margin and Variation Margin for Futures?