Article by:
Nikiforos Mathews And
Jonas Robison.
Cleared derivatives are generally characterized as being either
"collateralized-to-market" ("CTM") or
"settled-to-market" ("STM") in connection with
the mitigation of counterparty credit risk resulting from movements
in mark-to-market value. Under the CTM approach, transfers of
variation margin are characterized as daily "collateral"
transfers, with the transferring party having a right to reclaim
the collateral (a financial asset) and the receiving party having
the obligation to return the collateral (a financial liability), as
well as a legal right to liquidate the collateral in the event of a
close-out.
Under the STM approach, variation margin reflects daily
"gain" to the receiving party that is actually settled.
Despite the settlement of the gain on a daily basis, the
derivative's underlying economic terms remain the same (in
other words, there is no amendment or recouponing of the
trade). However, unlike
