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Published: 16th October 2009 by William Webster
Counterparty credit exposure (CCE) is a big issue it's why you have credit limits. When you lend money the risk is clear, will you get repaid? But with over the counter derivatives (like swaps) credit exposures are harder to see but nevertheless they are real. Derivatives with positive mark-to-market values generate credit risk. Why? Because default by the counterparty puts your profit at risk. One solution is collateral management. This involves a regular trade portfolio valuation and a net exchange of margin or collateral between the two parties involved.
Collateral management is a process; it mitigates your credit risk but at the same time increases your operational risks. It's too easy to focus on the credit aspect of collateral without identifying what else could go wrong. Let's have a look at ten of the main concerns. It's not an exhaustive list but it may help you identify where improvements can be made.
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6th January 2011
The FSA's proposed Dear CEO letter (Review of implementation of systems and controls requirements in liquidity regime dated December 2010) tells you that if it's not in writing it doesn't exist.
Learn about the following: Why collateral management is important. How collateral management works. The advantages of cross product collateral management. The terms used in collateral management. The advantages and disadvantages of collateral management.