ISDA Suggests Practices to Improve Collateral Management in OTC Market

The International Swaps and Derivatives Association March 8 published best practices for ensuring that over-the-counter derivative transactions are adequately collateralized so as to minimize the risk of loss that confronted some creditors in the Lehman Brothers bankruptcy.

In addition to the guidance—titled “Independent Amounts”—ISDA also published a review of current practices. According to both documents, collateralization provides protection in the event of a default on a transaction. Although it is meant to reduce risk, the recent financial crisis demonstrated that poor collateral management practices can actually magnify losses, ISDA said in a release. Its guidance recommends arrangements to avoid ...