http://www.barbicanconsulting.co.uk/collateral
Independent Amounts: The independent amount is an additional credit support amount that is required over and above the market value of the trade portfolio. The main purpose of the independent amount is to cater for changes in the market value of the trades between collateral calls. The independent amount can be a fixed amount or a percentage of the nominal size of the portfolio. There is resistance to providing an independent amount because it can adversely affect a firm's liquidity.
Some of the terms used are explained in more detail below:
Call & return amounts: The collateral amount that is being requested or given back.
Credit support document (CSD): CSDs are the documents that are agreed between the two parties that are establishing a collateral relationship. Normally the trades are documented under an ISDA Master Agreement, the CSDs then take the form of an annex or supplement to the Master Agreement.
Independent Amounts: The independent amount is an additional credit support amount that is required over and above the market value of the trade portfolio. The main purpose of the independent amount is to cater for changes in the market value of the trades between collateral calls. The independent amount can be a fixed amount or a percentage of the nominal size of the portfolio. There is resistance to providing an independent amount because it can adversely affect a firm's liquidity.
Mark-to-market (MTM): The current market value of a trade or trade portfolio.
Minimum transfer amount (MTAs): Collateral calls for amounts smaller than the MTA are not permitted. MTAs are designed to prevent the calling of nuisance amounts. This avoids unnecessary costs involved in small transfers. Typically the MTA will lie in the range of $50,000-$1,000,000. Increasingly there is a trend to set the independent amount at zero and use the MTA as a type of threshold.
Netting: Netting permits individual trade values to be added together to provide a single exposure. This is important to collateral management. If netting cannot be enforced you may end up with a gross exposure to the counterparty and insufficient collateral to cover it.
Threshold amounts: The threshold amount is an unsecured credit exposure that the parties are prepared to accept before asking for collateral. Ideally threshold amounts are set at relatively low levels in order to maximise credit risk mitigation.
Trade portfolio: The trades that are subject to the collateral process.
Valuation percentage: This is also called a "haircut". It is a percentage by which the market value of the collateral will be reduced. For example, collateral with a market value of $10m and a valuation percentage of 98% is only recognised as $9.8m for collateral purposes. Valuation percentages protect the collateral taker against falls in the value of the collateral during the period between collateral calls.
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