
Explanation:
By definition, OTC uncollateralized derivatives do not require counterparties to post collateral on a routine basis to cover mark-to-market exposures. This absence of routine collateralization significantly increases counterparty credit risk because there is no immediate mitigant in place if the counterparty defaults.
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Q.31 In an internal training session on counterparty credit risk for OTC derivatives traders at a bank, the head of risk management highlights a specific category of derivatives that presents unique challenges. The session seeks to deepen the understanding of how the absence of a standard risk mitigation tool affects the bank’s exposure. What is the collateral requirement typically associated with OTC uncollateralized derivatives?
A
Participants are required to post collateral based on credit ratings at predetermined intervals.
B
There is no routine collateral requirement; participants do not typically post collateral in these transactions.
C
Collateral is pooled among all participants to cover the obligations within the entire market segment.
D
A one-time collateral is posted at the start of the contract and released upon successful settlement.