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.