Reducing credit risk in over-the-counter derivatives
Some credit reducing techniques, such as bilateral netting and collateral agreements, have been used for years by a minority of counterparties to aid in their execution of trades with each other. Others, such as SPVs and multilateral netting are more recent innovations. The successful implementation of any of these credit reducing techniques will determine whether these markets experience continued growth or stagnate under the weight of credit constraints. This article will describe and analyze some of the more notable attempts at reducing credit exposure in derivatives.