“Threshold” defines the level of MtM above which collateral is posted. When the exposure is above the threshold, the threshold amount is under-collateralized. When the exposure is below the threshold, then it is not collateralized at all.

Things to Remember

• The "threshold" in a Credit Support Annex (CSA) is a predetermined level of Mark-to-Market (MtM) exposure. Collateral is required to be posted by a party when the MtM exposure exceeds this threshold.
• This threshold acts as a risk management tool, ensuring that collateral is posted only when the exposure reaches a level that is deemed significant enough to warrant additional protection.
• Setting a threshold helps in balancing the need for security against excessive demands for collateral, maintaining financial efficiency and liquidity for both parties.
• The threshold level varies based on factors such as the creditworthiness of the parties, the nature of the derivative contract, and market conditions.
• Understanding the threshold and its implications is crucial for parties in a derivatives contract, as it directly affects their collateral obligations and overall risk exposure.