Collateral and credit support

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Counterparty credit risk

Parties to over-the-counter (OTC) derivatives transactions (counterparties) are typically exposed to counterparty credit risk, which is the risk that a counterparty to a derivatives transaction with bilateral cash flows could default before the final settlement of the transaction.

If a default occurs, the transaction will terminate and a termination amount will be payable. Standard derivatives documentation provides for a variety of ways of calculating the termination amount, but in the majority of cases the termination amount will be based on the market value of the transaction at the time of termination, and a termination amount will be payable to the counterparty for which the transaction has a positive market value by the other counterparty, for which the transaction will have a negative market value.

Market conditions will change continuously throughout the term of a derivatives transaction so that, on any date, the transaction could have a positive market value for either counterparty, and upon termination for default it is possible that the

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