It is widely accepted that the introduction of bilateral margining requirements for non-cleared over-the-counter (OTC) derivatives will lead to a substantial reduction in counterparty risk. In a perfectly margined world, variation margin (VM) and initial margin (IM) should cover both current and potential future exposure with a high degree of confidence. In this case, under certain provisos, one may argue that exposure is reduced to zero.
This whitepaper focuses on the prospect of eliminating counterparty exposure through margining and three key areas for credit risk policy makers to consider.
• Is counterparty risk truly eliminated?
• What other types of risk does margining give rise to?
• What sort of limits and controls should be placed on margined trading activities?