For derivatives traders, collateral management was purely a matter for the back office. Until the financial crisis, that was. In practice, derivative markets survived the collapse of Lehman Brothers, and many of the safety mechanisms designed to manage the default of a major derivative counterparty worked successfully.
But some of Lehman’s clients found that sums owed to them on uncollateralised derivative transactions took months to recover through insolvency proceedings. And policy-makers perceived counterparty risk as a systemic threat worthy of legislation. Both the US Dodd-Frank Act and the EU’s Market Infrastructure Regulation aim to drive clearing for over-the-counter (OTC) derivative deals onto central clearing counterparties (CCPs).
