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Collateral

Collateral is used by banks and other financial institutions to reduce the counterparty credit risk arising from derivative transactions. Collateral is usually cash or other assets held by or pledged to a party (the collateral holder) to ensure they can cover the losses in case of a default (failure to pay) of the counterparty.  The two most common components of collateral agreements are Initial Margin (also called security deposit) and Variation Margin.