Collateral and credit support

This Overview is a guide to the Banking & Finance content within the Collateral and credit support subtopic, with links to appropriate materials.

Financial derivative transactions contain a number of risks, two of which are common to most forms of transactions. The first risk is that the other party will not pay what is due, or otherwise perform its obligations. In a worst case scenario, this would be due to that party’s insolvency. The second risk occurs in financial derivative transactions that provide for regular payment dates during the life of the transaction but in the periods between those payment dates, amounts are due but not payable until that date: this creates a credit exposure with a risk that the insolvency of one party before the next payment date means that the other party cannot recover what was due to it for that period.

As with other forms of credit risk, the exposed party will look to the other party to provide an acceptable form of security in order to remove or reduce that risk. This is common where one party may have a stronger credit status