Collateral

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A word about credit risk mitigation

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Financial Collateral Directive

In the context of the much, but fairly, maligned financial collateral directive, note the distinction drawn between

Credit support

Collateral, as a abstract concept, is securities and cash a counterparty puts up as credit risk mitigation under a title transfer collateral arrangement or a pledged collateral arrangement.

For example: a credit support annex. That’s a collateral arrangement.

Collateral contracts

A collateral contract — an even more abstract concept — is a binding agreement which is collateral to — in other words it supports or gives a person a right to enter into a contract.

For example: certain forms of option — swaptions for example — are collateral contracts.