Legal considerations when managing counterparty credit risk in OTC derivatives

Abstract

This paper analyses the main legal considerations for a party trading over-the-counter (OTC) derivatives transactions in the context of managing its counterparty credit risk. The paper looks at netting and collateral as key mitigants to counterparty credit risk. Each mitigant is examined in the context of normal trading conditions as well as following a default by a counterparty or the insolvency of a counterparty. As the subject of the paper is OTC derivatives, its analysis centres on the suite of industry-standard legal documentation published by the International Swaps and Derivatives Association, Inc. (ISDA) which is almost universally used as the framework documentation for OTC derivatives.