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Derivative contracts that do not pass through a central clearing counterparty.
Each party assesses the other's ability to perform and manages its exposure through limits, netting and collateral. Applicable rules may require initial margin for potential future exposure and variation margin for current exposure. Requirements differ by jurisdiction, entity and product. A clearing exemption is therefore not a blanket exemption from regulation, reporting or contractual risk controls.
Suppose a company and bank have a bilateral swap currently worth US$300,000 to the company. The bank posts US$300,000 of variation margin under their agreement. That addresses the current valuation, but a further price move before a defaulted position is replaced could create additional exposure. Initial margin, where required or agreed, is designed to provide a separate buffer for that risk.
ECB survey finds easier wholesale credit terms, with financing costs mixed