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Credit risk mitigation: Difference between revisions
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{{tag|Guarantees}} provided by third parties (whose [[credit risk]] isn't materially correlated to the counterparty’s) or {{tag|credit derivative}} transactions. | {{tag|Guarantees}} provided by third parties (whose [[credit risk]] isn't materially correlated to the counterparty’s) or {{tag|credit derivative}} transactions. | ||
{Box| | {{Box| | ||
===An Important point | |||
Note the difference between techniques which mitigate a credit risk that you nonetheless have — as above — and those which negate the credit exposure in the first place. So, ''par example'', a title-transfer collateral arrangement whereby a bank transfers outright collateral to a counterparty may, as part of a valid netting agreement, mitigate that collateral but will leave you with an exposure to any excess collateral or haircut; however transfer under a [[pledged collateral arrangement]] | ===An Important point === | ||
Note the difference between techniques which mitigate a credit risk that you nonetheless have — as above — and those which negate the credit exposure in the first place. So, ''par example'', a [[title-transfer collateral arrangement]] whereby a bank transfers outright collateral to a counterparty may, as part of a valid netting agreement, mitigate that collateral but will leave you with an exposure to any [[excess collateral]] or [[haircut]]; however transfer under a [[pledged collateral arrangement]] — at least [[to the exent]] that you don't surrender legal title to the collateral at all — will leave you with no counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it is yours, and if the counterparty goes [[bust]], you will be entitled to have it returned in full. | |||
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