ISDA Best Practices for the OTC Derivatives Collateral Process

8/2/2019 ISDA Best Practices for the OTC Derivatives Collateral Process

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Best Practices for the OTC

Derivatives Collateral Process

June 30, 2010

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Best Practices for the OTC Derivatives Collateral ProcessISDA Collateral Steering Committee - June 30, 2010 Page 2 of 20

Table of Contents

Introduction ................................................................................................................................................. 5

Section 1 - Client On-boarding, ISDA/CSA Set Up and Long Form Confirmations ...........................5

Best Practice 1.1: Capturing ISDA/CSA Terms on Internal Systems........................................................5

Best Practice 1.2: Exchange of Contact Information.................................................................................6

Best Practice 1.3: Exchanging Standard Settlement Instruction (SSI) Information...................................6

Best Practice 1.4: Non-Standard Agreements...........................................................................................6

Best Practice 1.5: Use of Standardized Industry Documentation..............................................................6

Best Practice 1.6: Terms of the Document................................................................................................7

Section 2 - Margin Requirement Calculations ....................................................................................... 7

Best Practice 2.1: Variation Margin (MTM) and Initial Margin (IA) on New Trades...................................7

Best Practice 2.2: Variation Margin (MTM) and Initial Margin (IA) on Terminated or Matured Trades .....7

Best Practice 2.3: Population of Trades to be Included ............................................................................7

Best Practice 2.4: Value of Collateral ........................................................................................................7

Section 3 - Call Issuance and Response................................................................................................ 8

Best Practice 3.1: Data Availability ............................................................................................................8

Best Practice 3.2: Data Integrity ................................................................................................................8

Best Practice 3.3: Content for Non Electronic Exchanged Collateral Call ................................................8

Best Practice 3.4: Data Validation .............................................................................................................9

Best Practice 3.5: Call Response Timing ..................................................................................................9

Best Practice 3.6: Content for Non Electronic Exchanged Response to Collateral Call ...........................9

Best Practice 3.7: Adjustment of Margin Calls ..........................................................................................9

Best Practice 3.8: Failure to Respond.......................................................................................................9

Section 4 - Settlement of Call ................................................................................................................ 10

Best Practice 4.1: Timing of Instructions for the Settlement of Collateral Movements............................10

Best Practice 4.2: Reconciliation of Collateral Balances.........................................................................10

Section 5 - Collateral Dispute Resolution ............................................................................................ 10

Best Practice 5.1: Portfolio Reconciliations for Collateralized Dispute Resolution .................................10

Best Practice 5.2: Identifying Issues Causing Disputes ..........................................................................11

Best Practice 5.3: Internal Firm Consultation Process ............................................................................11

Best Practice 5.4: Sharing Post Reconciled Portfolio Data.....................................................................11

Best Practice 5.5: Collateral Dispute Monitoring, Tracking, and Reporting ............................................11

Best Practice 5.6: Governance and Escalation .......................................................................................11


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Section 6 - Fails ...................................................................................................................................... 11

Best Practice 6.1: Identification ...............................................................................................................11

Best Practice 6.2: Notifications................................................................................................................12

Best Practice 6.3: Resolution Timeframe................................................................................................12

Best Practice 6.4: Escalation and Reporting ...........................................................................................12

Section 7 - Assignments........................................................................................................................12

Best Practice 7.1: Transferor...................................................................................................................12

Best Practice 7.2: Transferee ..................................................................................................................13

Best Practice 7.3: Remaining Party.........................................................................................................13

Section 8 - New Trades / Unwinds / Credit Events / Compressions..................................................13

Best Practice 8.1: New Trades................................................................................................................13

Best Practice 8.2: Unwinds......................................................................................................................13

Best Practice 8.3: Credit Events ..............................................................................................................13

Best Practice 8.4: Trade Compression....................................................................................................13

Section 9 - Rehypothecation and Substitution.................................................................................... 14

Best Practice 9.1: Tracking of Securities Eligible for Rehypothecation..................................................14

Best Practice 9.2: Reuse of Securities in Appropriately Aligned Settlement Periods .............................14

Best Practice 9.3: Substitutions - Recall and Delivery Times..................................................................14

Best Practice 9.4: Substitutions - Replacement Item in Event of Non Delivery ......................................14

Section 10 - Collateralized Portfolio Reconciliation.......................................................................... 15

Shared Education & Commitment........................................................................................................... 15

Best Practice 10.1: Internal Set-up and Understanding your Counterpartys Process............................16

Best Practice 10.2: Reconciliation Strategy.............................................................................................16

Best Practice 10.3: Reconciliation Frequency.........................................................................................16

Best Practice 10.4: Reconciliation Technology .......................................................................................16

Best Practice 10.5: Reconciliation Tolerances ........................................................................................16

Best Practice 10.6: Data Standards ........................................................................................................16

Best Practice 10.7: One Confirmation, One Trade..................................................................................16

Reconciliation Approach and Initial Results.......................................................................................... 16

Best Practice 10.8: Portfolio Valuation Date............................................................................................16

Best Practice 10.9: Trade Population......................................................................................................16

Best Practice 10.10: Product Identification..............................................................................................16

Best Practice 10.11: Trade Identification.................................................................................................16

Best Practice 10.12: File Transmission ...................................................................................................17

Best Practice 10.13: File Formats............................................................................................................17


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Best Practice 10.14: Availability of Portfolios for Reconciliation..............................................................17

Best Practice 10.15: Timing of Transmitting Portfolios for Reconciliation...............................................17

Breaks and Issue Management ............................................................................................................... 17

Best Practice 10.16: Process Transparency ...........................................................................................17

Best Practice 10.17: Prioritization and High-Level Drivers in Break Resolution .....................................17

Best Practice 10.18: Counterparty Responsiveness ...............................................................................17

Best Practice 10.19: Break Management ................................................................................................17

Best Practice 10.20: Internal Organization and Support .........................................................................17

Best Practice 10.21: Escalation and Effective Communication...............................................................17

Best Practice 10.22: Internal System Issues...........................................................................................18

Root Cause Analysis and Reporting.......................................................................................................18

Best Practice 10.23: Understanding Data Flows in the Front-to-Back Process......................................18

Best Practice 10.24: Minimum Standards of Results Reporting..............................................................18

Best Practice 10.25: Compliance............................................................................................................. 18

Conclusion................................................................................................................................................. 18

Section 11 - Interest Processing .........................................................................................................18

Best Practice 11.1: Settling Interest (Standard Monthly Interest Calculation).........................................18

Best Practice 11.2: Flooring of Interest Rates .........................................................................................19

Best Practice 11.3: Including Accrued Interest upon Final Return of Collateral......................................19

Best Practice 11.4: Interest Should be Calculated Using a Standard Formula.......................................19

Best Practice 11.5: Client Communication..............................................................................................19

Best Practice 11.6: Interest Calculation...................................................................................................19

Section 12 - Tri-Party Reconciliation .................................................................................................. 19

Best Practice 12.1: Collateral Balance Reconciliation.............................................................................20

References.................................................................................................................................................20

Copyright Notice2010 International Swaps and Derivatives Association, Inc.

Use RightsA non-transferable, cancellable license is hereby granted for use of this material provided that the source iscited and ISDA is acknowledged. An appropriate citation would be: Best Practices for the OTC Derivatives

Collateral Process (ISDA, 2010)


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Introduction

In June 2009, OTC derivative marketparticipants under the auspices of ISDA(International Swaps and Derivatives

Association) published the Roadmap for

Collateral Management (Roadmap) which wasa plan of action to reexamine the collateralmanagement function based on the marketevents of 2008. One of the Roadmapcommitments was the publication of a bestpractices document for collateral managementby June 30,

2010. This document, the ISDA Best

Practices for the OTC Derivatives CollateralProcess (Best Practices for Collateral) isintended to meet that commitment.

Best Practices for Collateral is the result of thecollaborative efforts of a working group of buy-side and sell-side market participants. The firmshave developed and sought industry feedbackon the scope and contents of thiscomprehensive document that providesguidance on current best practices for thecollateral management process.

The harmonisation of practice betweenpractitioners serves to mitigate risks inherent inthe collateral management process and alsosets expectations and standards for newentrants to the OTC market.

This document focuses on OTC derivative

trades collateralized on a bi-lateral basis underthe ISDA English and New York law CreditSupport Annexes (CSAs) and English LawCredit Support Deed (CSD) agreed between twoparties. It does not cover best practices for OTCderivatives that have been given up to centralclearinghouses by clearing members on theirbehalf or the behalf of their clients.

Proactive Industry Involvement

It is important to note that Best Practices for

Collateral is the latest in a series of industryefforts by collateral professionals to articulateand enhance collateral management practice.

Since 1998 with the publication of the firstGuidelines for Collateral Practitioners by ISDAsCollateral Committee, collateral professionalshave sought to improve the collateral process.Following the LTCM crisis, the first real test of

the newly-emerging collateral managementprocess in 1999, updated guidelines werepublished in 2005.

Other, and more recent contributions by theindustry which are referenced herein, include the

2009 Recommended Practices for CollateralizedPortfolio Reconciliation, Standards for theElectronic Exchange of OTC Derivative MarginCalls, the 2010 Market Review of BilateralCollateralization Practices and the Independent

Amount Whitepaper.

The pro-active focus on industry improvement isbased on continuing industry engagement andcollaboration to establish a set of best of breedpractices. These Best Practices for Collateralbring together elements of the above initiativesunder one cover (although the underlying

documents published by ISDA should remainthe primary and contextual point of reference).

Section 1 -

Best Practice

Client On-boarding,ISDA/CSA Set Up and Long FormConfirmations

IntroductionWhen on-boarding new clients onto internalsystems it is important to ensure that keyprocedures are followed and that tasks arecompleted accurately and in a timely manner,

prioritizing where necessary and aspiring to atwo to three-day turnaround.

Adherence to the established best practices willensure that the collateral operations teams arein a position to support the collateral process assoon as trading commences following theexecution of the ISDA/CSA or other tradeconfirmation. Both parties should ensure thatadequate resources are allocated to the on-boarding process to ensure that all proceduresare completed in the established timeframes.

1.1: Capturing ISDA/CSA Terms

on Internal SystemsPrincipleThe terms of a newly-signed ISDA/CSA shouldbe input into internal systems promptly afterexecution of the agreements or appropriately

prioritized relative to expected trading activity.


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DescriptionOnce a client is input into internal systems, thereshould be a procedure in place that enables thecollateral department to access all executedagreements and verify that operational termshave been captured correctly within the

collateral application.

The terms of the CSA which have been enteredin the legal documentation system shouldautomatically feed into the collateral calculationsystem. Where there is no system interfacebetween the legal documentation and collateralsystems, the collateral team must have accessto copies of executed documents.

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1.2: Exchange of ContactInformationPrinciple

General contact information for collateraloperations should be included in the CSA.

DescriptionEach institution should provide a group emailaddress, phone number and an initial operationscontact to help streamline the data collectionprocess when establishing new accounts.

It is incumbent upon all institutions to maintain acurrent listing of daily contacts. This shouldinclude department managers and, in somecases, credit officers.

1.3: Exchanging StandardSettlement Instruction (SSI) InformationPrincipleStandard Settlement Instructions (SSIs) shouldbe exchanged prior to first collateral delivery.

DescriptionEach institution should provide authenticatedSSIs for all eligible collateral pools covered bythe CSA. The verification process should becompleted before the first exchange of collateral.

Institutions are responsible for conforming to

their own internal funds transfer policy but as aminimum their process should include a callback to someone other than the individual whooriginally supplied the SSIs. The call backprocess also applies to amended SSIs.

A clients prime broker or outsourced operatorcan provide SSIs on behalf of the client if

evidence of delegation authority is received fromthe client.

1.4: Non-Standard AgreementsPrinciple

Any CSA or Long Form Confirmation, containing

non-standard terms should be reviewed bycollateral operations prior to execution.

DescriptionIf non-standard terms in a CSA or Long FormConfirmation will require manual support fromcollateral operations, the agreement must bereviewed and approved by operations prior to itsexecution. Each institutions operating areas areresponsible for supporting any manualprocesses in a controlled and efficient manner.

Additionally all non-standard processes shouldbe reviewed for effectiveness on a periodic basis.

1.5: Use of StandardizedIndustry DocumentationPrincipleWherever possible an ISDA Master Agreementand Credit Support Annex (CSA) should be usedto confirm collateral terms, if any, betweencounterparties. In the rare situation wheretrading of OTC derivative contracts is performedin advance of an ISDA/CSA being executed, thecollateral terms should be specified in a LongForm Confirmation.

Description

OTC derivative transactions should not beexecuted without a signed ISDA Master

Agreement and Credit Support Annex in place, ifappropriate, with the counterparty. Oncecounterparties have executed these agreements,only the economic terms of a transaction willneed to be negotiated and documented eachtime a transaction is completed.

In the absence of an ISDA/CSA, tradingrequiring collateralization should be documentedunder an ISDA Long Form Confirmation with theappropriate collateral terms included. All efforts

should be made to reduce the dependency onLong Form Confirmations as the process is notscalable across the industry. In addition, anycollateral terms in a Long Form Confirmationshould be reviewed by legal, credit and collateraloperations functions prior to trade execution toensure each area can support the tradeappropriately.


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All Long Form Confirmations should state thatthe terms and conditions included will besuperseded when the ISDA/CSA is signed. Anysubsequent ISDA/CSA should include wordingto the effect that this executed agreementsupersedes the terms included in the Long Form

Confirmation.

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1.6: Terms of the DocumentPrincipleLong Form Confirms should, at a minimum,contain the standard collateral definitions (asdefined it the Credit Support Annex) wherever

possible.

DescriptionThe collateral terms included in the Long FormConfirmation should be captured in the collateralsystem allowing for an automated collateral call

process.

Margin RequirementCalculations

IntroductionWhen calculating exposure for margin calls it isimportant to ensure that exposure is calculatedon a timely basis, using accurate valuationparameters consistent with standard marketpractices. The margin requirement calculationwill include the mark to market of the specifictrades covered by the agreement (variationmargin), any independent amounts (IA or initialmargin) which could be applicable at a trade orportfolio level, the valuation of collateralpreviously held or posted, and the application ofthe terms of the agreement (for instance,threshold and minimum transfer amounts).

The application of rules related to netting, thescope of agreement, branches and legal entityshould be automatically applied so that onlytrades falling within the agreement parametersare included in the margin calculation.

Adherence to the established guidelines willensure that the collateral operations teams arein a position to consistently apply exposurecalculations in accordance with both theISDA/CSA and market conventions. This willhelp minimize margin disputes and ensuretimely exchange of collateral amounts betweenthe parties to the margin agreements.

2.1: Variation Margin (MTM) andInitial Margin (IA) on New TradesPrincipleFor new trades, initial and variation marginrequirements should be included in margincalculations on trade date plus 1.

2.2: Variation Margin (MTM) andInitial Margin (IA) on Terminated or MaturedTradesPrincipleTo be added.

DescriptionTo be added.

2.3: Population of Trades to beIncludedPrinciple

All derivative product types between two partiesas defined by the ISDA CSA should be includedin the collateral call process.

DescriptionAny trade that matches a derivative product typethat is listed in the CSA should be included inthe collateral calculation used to determinewhether or not a collateral exchange is required.CSAs can be ambiguous with respect to foreignexchange trades and lack differentiationbetween spots and forwards. Best practiceshould be to define explicitly in the CSA anyproduct type (for example FX Spot) that is to beexcluded from the collateral calculation.

2.4: Value of CollateralPrincipleCollateral should be revalued daily beginning onvaluation date with haircuts applied consistentwith the CSA. Eligible Collateral should beclearly defined in the CSA. Securities collateralshould be valued including accrued interestwhile cash collateral values should generallyexclude accrued interest. Reporting should beavailable to enable regular reconciliation ofcollateral amounts between the parties to assist

with dispute resolution.

DescriptionCollateral should be maintained at theISIN/CUSIP level with market recognized pricingfeeds to enable daily recalculation of collateralvalues at each days closing values. Current(post haircut) collateral values should beincluded in margin calls.


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Section 3 - Call Issuance andResponse

IntroductionThe move towards greater automation viaelectronic messaging will standardize the

delivery method, content and formatting andimprove the timeliness and security of callissuance and response.

The sequence, content, timing and frequency ofmessages to be electronically exchanged in themargin call process has been separately definedin the ISDA document, Standards for theElectronic Exchange of OTC Derivative MarginCalls published in November 2009.

Set out below are the best practices associatedwith non-electronic margin call issuance and

response as well as the importance of dataintegrity to the overall process.

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e 3.1: Data AvailabilityPrincipleIt is imperative that the data used in the margincalculation be received into the collateral systemin a timely manner allowing for margin calls tobe issued as soon as possible.

DescriptionIt is critical to establish firm cut offs for deliveryand receipt of trade level details into collateralsystems. All business areas should be madeaware of timeframes for the delivery of data andthat trades booked after the cut off will not feedinto systems and will not be included in themargin call.

Timeliness for mark to market and independentamount adjustments is key for business andcontrol areas to achieve optimum data integrity.This ensures that there is adequate time for signoff and validation prior to the marks beingpublished and a margin call being issued.

Calls must be issued by the notification

deadlines outlined in the CSA; however, it ispreferable for a call to be issued as early asoperationally possible.

e 3.2: Data IntegrityPrincipleCollateral practitioners must ensure that robust

processes and controls are in place to monitordata integrity. It is important that the data

contained within the margin call, along with theunderlying data, is as complete and accurate as

possible in order to minimize the risk of calldispute.

Description

Margin call calculations rely on several datasources: trade and exposure data, collateralpositions, agreement terms, market data, andinstrument data. Firms should have in placecontrols to measure the accuracy of such data.

For example, it is critical that completenessprograms monitor and track the receipt of allfiles and raise warnings and highlight potentialmissing or incomplete data.

3.3: Content for Non ElectronicExchanged Collateral Call

PrincipleFor the issuance of non-electronic exchangedcollateral calls, the following minimum standarddata fields should be included:

1. Principal Counterparty Reference Reference of the client issuing the margincall

2. Counterparty Reference Reference of theclient receiving the margin call

3. Valuation Date The close of business datefor which the principal counterparty isissuing the margin call

4. MTA Minimum amount to pay/receive asspecified in the agreement in the basecurrency.

5. Threshold Amount of exposure acounterparty will accept before issuing amargin call in the base currency

6. IA Required Credit Support, in addition tothe Variation Margin, included in the MTM inthe base currency

7. Total MTM Net market value of theportfolio in the base currency

8. Margin Requirement - Value of therequested collateral transfer in the basecurrency
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3.4: Data ValidationPrincipleBefore responding to a counterparts call, acollateral representative should quickly verify thecore data elements that make up a collateral call.

DescriptionParties should perform a simple mathematicalcheck to ensure their counterpart has performedthe correct mathematical calculation to arrive ata call amount.

3.5: Call Response TimingPrincipleGenerally speaking, counterparts should providea response at latest by close of business on theday a call is received, provided settlement is calldate +1. Where call issuance and settlement ofcollateral is same day, wherever possible,

responses should be received no later than onehour prior to closing of the securities market andtwo hours prior to cash deadlines.

DescriptionParties should have the system capability andthe procedural framework in place allowing fordelivery of collateral within the timeframesagreed upon in the CSA. If a party has agreed adelivery and is aware that it will be late in paying,every effort should be made to notify thereceiving party to avoid unnecessary loss due topositioning of funds.

3.6: Content for Non ElectronicExchanged Response to Collateral CallPrincipleIf a party is responding to a collateral call in anon-electronically exchanged message then

parties should include, at a minimum, the belowfields in their collateral call response:

1. Counterparty Reference Reference of theclient responding to the margin call

2. Indication of agreement or a full or partialdispute.

3. Collateral Amount Amount of collateralagreed to and being sent

4. Collateral Type e.g., EUR/USD cash orsecurity ID and par value

5. Settlement Date The business date forwhich the counterparty is delivering theagreed collateral

6. Total MTM - Net market value of theportfolio in the base currency if anything

other than agreed in full

3.7: Adjustment of Margin CallsPrinciple

Adjusted (revised) margin calls, when required,should be issued as early as possible during theday. The receiving party should endeavor toreview and respond to the adjusted margin callin a timely manner to meet delivery timings inthe CSA on a reasonable efforts basis.

Description

It is recognized that adjusted margin calls maybe necessary from time to time due to pricing,collateral or other issues. The parties shouldwork together to provide notification, to respondto these adjusted calls and then deliver collateralon a reasonable efforts basis, even if thenotification timing does not meet the formaldefinition in the CSA.

e 3.8: Failure to RespondPrincipleFrom time to time counterparts may experiencetechnical difficulties preventing them fromanswering margin calls within the acceptedtimeframes. Wherever possible, parties shouldendeavor to communicate the existence oftechnical difficulties prohibiting call response assoon as possible.

DescriptionAs there is clear guidance regarding theissuance of collateral calls and the subsequentdelivery of collateral arising from that call, it canbe assumed that a failure to respond by close ofbusiness on settlement day constitutes a failureunder the terms of the CSA. A response to avalidly issued collateral call should not be

delayed by unnecessary requests for additionalinformation. Parties should communicatetechnical difficulties prohibiting call response assoon as possible.


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Section 4 -

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Section 5 -Settlement of Call

IntroductionIn order to settle collateral calls it is important toensure that appropriate procedures and controlsare in place to ensure timely and accurate

instruction of collateral movements and tominimize counterparty risk.

4.1: Timing of Instructions forthe Settlement of Collateral MovementsPrincipleOnce the collateral type to be delivered hasbeen agreed by both parties settlementinstructions for collateral movements should beeffected including both deliveries and receipts ofcollateral, cash and securities.

DescriptionProcedures should be in place to ensure thatinstructions for the settlement of collateralmovements are effected once the collateral tobe delivered has been agreed by both parties.This may involve the release of instructionsdirectly from collateral systems linked directly topayment systems or the provision of settlementinstructions to an independent settlementfunction for execution.

Instructions should be input to the appropriatesettlement systems for both the receipt and thedelivery of securities to facilitate matchingbetween both parties to the transfer. This

principle equally applies to the movement ofcash collateral, though matching is not required.

Reconciliation of CollateralBalancesPrincipleWhere payments are effected in asettlements/payment system which is notembedded within the collateral system, areconciliation of collateral balances should be

performed between the systems on a daily basis.

Description

A daily reconciliation of collateral balancesshould be performed where there is no directlink between the collateral system and theappropriate collateral movement settlementsystem. All discrepancies should be investigatedand corrected promptly.

Collateral DisputeResolution

IntroductionAt the direction of ISDAs Board of Directors, theISDA Collateral Committee in consultation with

the ISDA Product Steering Committees, otherindustry associations and financial industryregulators are developing the ISDA CollateralDispute Resolution Procedure (DR Procedure).

The DR Procedure is intended to provide anagreed standard industry approach foreffectively dealing with disputed OTC derivativecollateral calls. The initial draft of the DRProcedure was published on September 30,2009 following extensive industry consultationand a public comment period. At the time ofexpected publication of this Best Practice

document, the DR Procedure is undergoingadditional testing and modification by industryparticipants ahead of an updated draft to bepublished by September 30

th, 2010.

The following best practices are intended to beused as general guidance for the resolutioncollateral disputes to be further defined andenhanced by the final agreed upon DRProcedure.

Best Practice 5.1: Portfolio Reconciliations forCollateralized Dispute ResolutionPrincipleFirms should have the ability to easily extract atrade file from their collateral system, on aregular or ad-hoc basis, to facilitate a portfolioreconciliation in the event of a collateral dispute,or otherwise. Where possible, trade portfoliosshould be reconciled pro-actively on a regularbasis.

DescriptionParties should have the system capability andthe procedural framework in place to allow forthe easy extract of trade level data to facilitatereconciliation, pro-active or otherwise, of

collateralized trades.

For more information regarding PortfolioReconciliations, see Collateralized PortfolioReconciliation: Best Operational Practicespublished January 20

th, 2010 and available on

the ISDA website
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Section 6 -

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5.2: Identifying Issues CausingDisputesPrincipleFirms should ensure there is an internalinvestigation process in place to identifyvaluation and/or operational trade breaks

causing a collateral dispute.

DescriptionThe source of a collateral dispute should beidentified as quickly as possible after theportfolio reconciliation is completed and shouldbe escalated to the appropriate internal and/orexternal client contact(s) on a timely basis.

e 5.3: Internal Firm ConsultationProcessPrincipleFirms should establish internal processes for the

investigation and resolution of trade breakscausing collateral disputes across all relevantareas.

DescriptionFirms should clearly define roles andresponsibilities across all relevant front, middleand back office areas involved in the resolutionof a collateral dispute.

5.4: Sharing Post ReconciledPortfolio DataPrincipleFirms should establish internal guidelines and

policies to ensure trading desk access tocounterparty portfolio content and valuationdetails takes place only on a valid need to knowbasis.

DescriptionA party in receipt of portfolio content andvaluation details from its counterparty tofacilitate the collateralization process orresolution of a margin dispute should takecommercially reasonable measures to keep thatinformation confidential from trading desk

personnel, except to the minimum extent ofdisclosure practicable where such trading deskpersonnel have a need to know in order to assistin the collateralization or dispute resolutionprocess

5.5: Collateral DisputeMonitoring, Tracking, and ReportingPrinciple

Collateral disputes should be monitored, trackedand reported from both a party and counterparty

perspective.

DescriptionFirms should have capabilities for aging and

tracking the status of all collateral disputes fromboth a party and counterparty perspective.Collateral dispute aging should be available on acalendar day basis.

5.6: Governance and EscalationPrincipleProper governance and/or escalation

procedures should be in place to ensure properSenior Management visibility into collateraldisputes and associated resolution activities..

Description

Senior management in trading, operations,finance, and credit risk should have forumsand/or communications in place to ensure focusis maintained on each specific collateral disputeand to monitor the effectiveness of the overalldispute resolution process.

Fails

IntroductionIn the event that an agreed upon collateraltransfer is not settled by the collateral transferdate it is important that all relevant parties are

informed, and that there is a procedure in placeto quickly resolve any issues. The counterpartyrisk associated with failed collateral transfers willbe mitigated as quickly as possible if bothparties have well-defined escalation points andsufficient resources to address the problem.Identifying the cause of failed transfers andimplementing protocols to resolve systematicissues leading to failed transfers will ultimatelyreduce the total number of fails in the market.

6.1: IdentificationPrinciple

Systems and procedures should be in place toactively monitor settlement status of all forms ofcollateral transfers.

DescriptionSWIFT or other electronic communicationmethods can be utilized to automatically updatesettlement status on collateral transfers. Failreports generated by these systems should beactively reviewed by a firms settlements team.


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In the absence of an electronic communicationmethod, manual procedures should beimplemented to gather settlement statusinformation. Custodians should be required toprovide information for failed transactions on asettlement date +1 basis. This information

should be consolidated and reviewed by thefirms settlements team.

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Section 7 -

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e 6.2: NotificationsPrincipleOnce a failed collateral transaction has beenidentified, the party that has identified the failedcollateral delivery should promptly notify theother to allow ample time to resolve the issue.

DescriptionBoth parties should be aware of a failedtransaction if the proper identification steps are

in place. However, the party that has failed toreceive collateral should advise the party thathas failed to deliver to ensure that appropriatesteps to resolve the fail have been initiated. Toensure that the correct transaction isinvestigated, the notifying party should supply, ata minimum, the following information: AccountName, Security ID (or cash), and Quantity. Also,once identified, pending settlements should benoted on outgoing collateral calls.

Collateral Control Agreements (CCAs) are setup with reporting and communication provisionsenabling the beneficiary to monitor collateralsegregated on its behalf. This communicationtype defined in the CCA should allow thebeneficiary to easily confirm that the agreedupon transaction has been processed. In theevent that a transaction is not processed, thepledging party is responsible for addressing thedeficiency, and having the custodian advise thebeneficiary immediately upon completion.

e 6.3: Resolution TimeframePrincipleFailed collateral transactions should be resolvedon the day they are identified or the next

available settlement date determined by marketsettlement cycles (ex JGB or Eurocleartransfers).

DescriptionOnce a fail is identified, settlement teams shouldwork to resolve the problem as soon as possible.If the sending party was DKd, settlementinstructions should be exchanged and re-verified.

The cause of any recurring settlement issue(incorrect SSI, any settlement flag, problemswith custodians/cage, etc.) should beinvestigated, and steps should be taken toeliminate these issues going forward.

6.4: Escalation and ReportingPrincipleFailed collateral settlements should be recordedon an end of day fails report. This report shouldbe distributed to operations managers and creditofficers with escalation procedures in place toaddress aged fail items.

DescriptionAll failed settlements should be listed on asystem-generated fails report. Ideally this reportshould be available close of business each day.The report should name the counterparty that

failed, the type and amount of collateral and thedate the settlement should have occurred. Agingshould be applied to all fails. The report shouldbe distributed to all relevant operationsmanagers and credit officers on a daily basis.

Assignments

IntroductionWhen an assignment occurs, exposure on theapplicable trade moves from one counterparty(Transferor) to another (Transferee), while theexposure for the Remaining Party is unchanged

and simply moves from Transferor to Transferee.Collateral requirements shift from TransferorCSA to Transferee CSA. These relevantexposure moves occur one business day afterthe Novation Trade Date. Effective Date of theunderlying transaction is irrelevant for purposesof collateral.

7.1: TransferorPrincipleThe Transferor in stepping out of the trade nolonger has any collateralized exposure to theRemaining Party as of the Novation Effective

Date. All collateralized exposure related to thetrade in question should be removed from the

portfolio of the Transferor as of the NovationEffective Date + 1.

DescriptionAs Best Practice, the settlement/fee related toan assignment should be collateralized between


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the Transferor and the Transferee. If theTransferor removes its position from the portfolioof the Remaining Party on Novation EffectiveDate +1, the exposure related to thesettlement/fee should remain collateralized withthe Transferee until the applicable settlement

date.

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7.2: TransfereePrincipleThe Transferee stepping into the trade willcollateralize the full exposure of the swap withthe Remaining Party on trade date +1 of theassignment, subject to its CSA with theRemaining Party.

DescriptionThe settlement/fee related to the assignment iscollateralized between the Transferee and the

Transferor until the applicable settlement date.The Transferee will continue to collateralize itsnew position versus the Remaining Partyfollowing current market standards.

7.3: Remaining PartyPrincipleThe Remaining Party simply moves theexposure from the Transferor to the Transferee.Their exposure on the transaction does notchange in an assignment.

DescriptionThe consistent collateralization of thesettlement/fee between the Transferor andTransferee will result in more accurate callsbetween the parties. The Transferor would nolonger be hesitant to remove its trades, as itssettlement risk would be fully collateralizedversus the Transferee.

New Trades / Unwinds /Credit Events / Compressions

IntroductionThe following section outlines best practice for

collateralizing each of the trade events listed.

e 8.1: New TradesPrinciple

All new trades are to be included in the collateralcalculation on trade date +1. All upfront fees onnew trades should be included in the calculationuntil settlement date.

DescriptionAll new trades and upfront fees should beincluded in the relevant collateralized portfolioson trade date +1 regardless of effective date.Parties should not be able to claim that dealsare not included in the collateralized deal

population on T+1 because their effective date isT+2.

8.2: UnwindsPrincipleExposure related to trades that are unwoundshould stay in the portfolio through settlementdate.

DescriptionOne reason for collateral call differences is dueto one party dropping unwound trades from itsmargin calculation on the unwind date while the

other party drops the same trade on settlementdate. Exposure related to the unwound tradesshould remain in the collateralized portfoliothrough settlement date.

8.3: Credit EventsPrincipleExposure related to trades that are subject to aCredit Event should remain in the collateralized

portfolio through settlement date.

DescriptionSimilarly to unwound trades, credit events cancause collateral call differences by one partydropping the impacted trades from the collateralcalculation on auction date while the othercollateralizes through settlement date. Inaddition, if a trade is live at the time of anapplicable Credit Event and then subsequentlymatures before Auction Date, it should remain inthe portfolio until settlement date as the CreditEvent occurred before the Maturity Date.

8.4: Trade CompressionPrincipleTrades that are subject to industry wide tradereducing events should be removed from the

portfolio on the day the trade-reducing eventoccurs. This should be in agreement withgoverning documentation for the applicable riskreducing process.

DescriptionAll unwound trades should be removed from theportfolio on the execution date of the applicable


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event. All replacement trades should be bookedaccording to the relevant compressionguidelines and subsequent exposure forreplacement trades should be included incollateralized exposure on the date followingexecution.

Section 9 -

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Rehypothecation andSubstitution

IntroductionThe granting of rehypothecation rights and thesubstitution of collateral under the ISDA CSAare standard elements of collateralization whereappropriate, but have been under closeinspection recently due to issues in otherproduct sets. The decision to grantrehypothecation rights, usually on a reciprocal

basis, is a decision made by both sides to theagreement.

9.1: Tracking of SecuritiesEligible for Rehypothecation

PrincipleIt is the obligation of the secured party to ensurethat all assets, whether eligible forrehypothecation or not, are tracked inaccordance with the agreed terms of the ISDACSA. Where appropriate this obligation can beassigned to an agent, but responsibility in abilateral agreement resides with the secured

party. The correct reuse rights of secured assetsshould be checked regularly.

DescriptionA critical element of the collateral processespecially involving securities pledged is theability to differentiate between assets that aredelivered by a pledgor that has grantedrehypothecation rights and those that have beendelivered without those rights. If thisdifferentiation is not in place, the risk is thatineligible assets may be inadvertently reusedInappropriately.

9.2: Reuse of Securities inAppropriately Aligned Settlement PeriodsPrincipleWhere rehypothecation rights are granted, toavoid settlement fails, it is advisable to ensurethat the settlement convention of the marketwhere the assets are being reused is alignedwith the settlement convention of the ISDA CSA.

DescriptionThe ability to reuse assets, whether throughrehypothecation or title transfer rights, opens upthe possibility of taking those assets from oneset of settlement rules, very specific to the OTC

derivatives market, into shorter or longersettlement and recall environments therebyincreasing the opportunity for a settlement fail.

It is therefore advisable that the settlementconvention of the market where the assets arebeing reused is aligned with the settlementconvention of the ISDA CSA .

9.3: Substitutions - Recall andDelivery TimesPrincipleParties should endeavor to make substitution

requests as soon as possible but no later than5pm time on T in the time zone in which secured

party is located. Wherever possible, the securedparty should endeavor to return items of postedcredit support on the same day in which thesecured party receives the substitute creditsupport but no later than the next local businessday.

DescriptionWhere possible, delivery back of a requesteditem of posted credit support should take placein the same day that a substitute credit supportis received, especially when the substitute itemuses the same settlement convention and is inthe same country.

9.4: Substitutions - ReplacementItem in Event of Non DeliveryPrincipleIn the event that the secured party is unable tosource and return the pledged asset, unlessotherwise agreed by the parties, the secured

party must provide an exact ISIN/CUSIP notlater than one local business day after thesubstitute credit support item is received.

DescriptionIf the pledgor requests that specific assets bereturned for substitution, the secured party isobligated to deliver collateral with that specificISIN/CUSIP no later than the next local businessday after which the substitute credit support itemis received.


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Unless agreed to by both parties, sending backequivalent securities or cash is unacceptable.

Section 10 - Collateralized PortfolioReconciliation

IntroductionWith the growth in derivatives market volumesas well as the size and diversity of bilateralportfolios, operational risk exposure canincrease if counterparties do not accuratelyreflect derivative transactions in their systemrecords. Recently regulators have alsoexpressed interest in the need for marketparticipants to validate the accuracy of derivativeportfolio populations on a regular basis. As aresult the G-14 financial institutions havecommitted to reconciling their collateralized

portfolios on a daily basis.

Portfolio reconciliation is a process thatcompares the transaction records of twocounterparties as of a given business date toensure that both counterparties have anaccurate record of the trades in their datasystems. The collateral function reconcilesportfolios on a reactive basis to identify thesources of a specific collateral dispute and on aproactive basis to prevent those disputes.

The benefits of portfolio reconciliation have alsobeen recognized in other areas of the firm, forexample in validating trade valuations and tradefacts. The scope of this document, however, islimited to reconciliations performed as part of theOTC collateral function, and applies only toportfolios governed by a bi-lateral ISDA CSA,CSD or other OTC collateral agreement.

The objective of collateralized portfolioreconciliation is to ensure that two organizationshave one consistent record for a definedportfolio (or group of portfolios) of OTCderivatives by comparing the portfolio contentsprovided by each participant in order to

individually match the underlying trades. Thereconciliation process uses a minimum set offields necessary to ensure accurate matchingand, as standard practice, includes the mark-to-market value each party has assigned to eachtrade. To assist this process, ISDA haspublished the minimum field requirements forportfolio presentation as Minimum Market

Standards for Collateralized PortfolioReconciliation.

Collateralized portfolio reconciliation does notprovide legal confirmation of individual trades,nor does it seek to revalidate the confirmation

process on an ongoing basis. Additionally, theprocess does not extend to reconcilingcashflows or trade lifecycle events (e.g., rateresets, credit events, market disruption events),although the trade linkages created by regularand robust portfolio reconciliation can help toidentify any booking discrepancies occurring asa result of individual trade events.

In 2008, the ISDA Collateral Committeepublished Portfolio Reconciliation in Practicewhich presented guidelines and considerationsfor portfolio reconciliation.

However as the practice of portfolioreconciliation has expanded, a range ofsophisticated options for reconciling portfolioseither with in-house solutions or with a vendorservice has also increased which can reduce theeffectiveness of the process. The ISDACollateral Committee Portfolio ReconciliationWorking Group collaborated to produce thedocument, Best Operational Practices forCollateralized Portfolio Reconciliation as asupplement to the 2008 paper. The commonlyagreed to industry standards are provided belowbut the reader should refer to the BestOperational Practices for Collateralized PortfolioReconciliation available on the ISDA website formore information.

Shared Education & CommitmentWhen commencing any new reconciliationrelationship with a counterparty, or whenreconciling for the first time, it is important toappreciate the bilateral nature of the relationshipand that both parties share a responsibility towork together co-operatively.

Time is of the essence when performingreconciliations, particularly in the case ofcollateral call disputes where strict timeframesare in effect. In order to be effective, partiesshould give early consideration to how they willoperate their reconciliation process and beprepared to agree mutual priorities when on-boarding new counterparties.
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10.1: Internal Set-up andUnderstanding your Counterpartys ProcessPrincipleBoth parties should understand the size andstructure of their respective teams, and agreewhich resources which will be allocated to

working on reconciliations. Exchangingorganization charts and contact lists, anddiscussing trigger points for escalation is alsoadvised.

Reconciliation StrategyPrinciple

A proactive and regular reconciliation strategyrather than a reactive (dispute or credit eventdriven) reconciliation strategy should be pursuedfor larger actively-traded portfolios.

Reconciliation Frequency

PrincipleThe frequency of reconciling portfolios shoulddepend on the size, volatility and trading activityin any bilateral portfolio, as well as the type andcredit standing of the parties involved.

Reconciliation TechnologyPrincipleWhether an in-house or outsourced solution orboth, counterparts should make use ofreconciliation technology for reconciling their

portfolios to facilitate b-lateral involvement andtransparency over results. Automated solutionsreduce significantly the amount of resourcesnecessary to reconcile portfolios and result in amore efficient, timely and controlled process.

Reconciliation TolerancesPrincipleParties should discuss and agree tolerancesbetween themselves in order to determine whatthey judge to be significant markto-marketdifferences, as well as material trade bookingdiscrepancies and any other differences thatmay arise.

10.6: Data Standards

PrincipleThe OTC derivatives industry should move toadopt Market Minimum Standards for data

presentation in collateralized portfolioreconciliation.

10.7: One Confirmation, OneTradePrinciple

Aspirationally, parties should be able torepresent any type of trade as a single line ofdata in their reconciliation files. This follows the

principle of one confirmation = one trade.

Reconciliation Approach and Initial Results

Correct population of portfolios and correct tradeidentification results in better and more accuratematching of bi-lateral portfolios. This willreduce time taken in manually matching tradesand enable the parties to focus on true breaks.

The parties will need to develop a mutuallyagreed approach to their handling ofreconciliations, including when the portfolio willbe valued, when files will be available andmethods for transmission and communication.This consistency of approach will result in amore efficient and effective process.

e 10.8: Portfolio Valuation DatePrinciplePortfolios should be valued and populated as ofclose of business on the previous business day.

10.9: Trade PopulationPrincipleThe trade population of portfolios to bereconciled should be consistent with the trade

population under the governing ISDA MasterAgreement or other collateralized OTCagreement.

Product IdentificationPrincipleIndividual trades within the portfolio should beidentified using a product classification at the

point of reconciliation.

Trade IdentificationPrincipleEach trade in the portfolio should contain thatcounterpartys unique trade ID (as referenced ifapplicable in the Confirmation) together with anycommon market IDs that may have beenassigned by an electronic confirmation platform.

Where available, unique counterparty IDs shouldbe submitted as part of the reconciliation file. Itis best practice that these should be captured as

part of the confirmation/affirmation process.Structured trades recorded using multiple legswith multiple IDs should have an additionalcommon ID assigned to all legs to facilitate thematching process.


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File TransmissionPrincipleFiles for reconciliation should be transmitted bysecure means, recognizing that flexibility may berequired and even desirable in certain situations.

File FormatsPrincipleFiles for reconciliation should be sent in acommonly-available standard industry format,and agreed between the parties at the outset oftheir reconciliation activities.

Availability of Portfoliosfor ReconciliationPrincipleTo facilitate timely Dispute Resolution and toencourage the development of a proactivereconciliation strategy across the market,

portfolios should be available for reconciliationon any mutual business day by request of eithercounterparty.

Timing of TransmittingPortfolios for ReconciliationPrincipleParties should agree the time by which files areto be exchanged or uploaded. This should occuras soon as possible following the portfolioValuation Date and not later than mid-day in thelocation of the collateral call or the locationwhere the reconciliation function resides ifdifferent.

Breaks and Issue ManagementOnce reconciliations are performed, parties mayidentify breaks or differences in their bilateralrecords.

Breaks may occur simply due to timingdifferences in allocating a trade to a portfolio ortaking it out of the portfolio. In this event, onlyone party will show the trade at the time of thereconciliation (i.e., unmatched or allegedtrades ). Also parties may see mismatches intrade populations due to system constraints,

although the trade is actually recognized by bothparties.

Alternatively, the reconciliation process mayuncover genuine breaks between the parties,such as parameter differences, i.e. differences intrade booking, or valuation differences whereparties may be adopting different valuationmodels.

In all cases, the parties need to have aneffective channel of communication in order toraise and resolve breaks. Responding to arequest for break investigation and addressingthe underlying cause(s) should be seen as high

priorities.

Process TransparencyPrincipleTo assist break resolution, full results of allbreaks arising from any reconciliation should beavailable if requested by the counterparty. Thisincludes trades with field differences, MTMdifferences and unmatched trades. This principleapplies irrespective of technology used to

perform the reconciliation, whether performed in-house or through a vendor-serviced external

platform.

Prioritization and High-Level Drivers in Break ResolutionPrincipleParties should agree mutual priorities for breakresolution and what will be their focus in terms ofaddressing the main categories of breaks.

CounterpartyResponsivenessPrincipleFirms should give priority to and be adequatelyresourced to support timely response to arequest for investigation of breaks.

Break ManagementPrincipleParties should clearly identify which of them isassigned to action a particular break and theyshould track the progress of resolving agreedbreaks. Documentation, confirmations, orinformation requested by the firm investigatingthe break should be provided in a timely mannerand no later than one business day following arequest.

Internal Organization

and SupportPrincipleFirms should have a process in place whichreaches across relevant functional areas inorder to resolve issues or root causesuncovered as part of the reconciliation process.

Escalation and EffectiveCommunication


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PrincipleFirms should have formal escalation proceduresin place for addressing and actioning breaks inthe portfolio promptly. Escalation proceduresshould focus on timeframes and process forcommunicating with impacted departments, for

example operations, middle office, credit,product controllers and front office.





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Internal System IssuesPrincipleWhen the reconciliation process establishes thatthe cause of the trade break is an internalsystem or process at one of the counterparties,it is expected that the counterparty will work ingood faith to resolve the underlying data issue ina timely fashion.

Root Cause Analysis and Reporting

Trades requiring investigation which are not truebreaks, e.g. late bookings, novations, tear-ups,settlements create noise in the portfolio. Thisnoise is worst in the 1-2 day period but can lastup to 5 days and over. With actively tradedportfolios it is important to know the source ofrecurring issues and to understand the nature ofthe problems involved. Identifying root causesand reporting of differences helps both parties tounderstand the issues and take steps toincrease auto-matching rates. The ultimate goalis to reduce the time spent in managing regularreconciliations and to focus on resolving any realbreaks between the parties.

Understanding DataFlows in the Front-to-Back ProcessPrincipleFlawed data and process standards willcontribute a significant amount of noise to thereconciliation process, with new or maturingtrades and system issues underlying many ofthe breaks between the parties. It is thereforeimportant that parties understand their internalfront-to-back process and data and pricingsources, in order to successfully filter out theseissues from the population of breaks to be

addressed.

Minimum Standards ofResults ReportingPrincipleFirms should agree minimum standards andmethods for reporting breaks in order to supporttransparency of results following any portfolioreconciliation.

CompliancePrincipleFirms should measure their compliance againstthese Best Practices and identify gaps to beaddressed.

ConclusionThese Best Practices have been drawn up by awide group of market practitioners and representa common view of operational criteria whichsupport maintenance of portfolio integrity.

Since OTC derivatives documented under ISDAMaster Agreement terms are bilateral contracts,these Best Practices recognize that partiesshould be free to decide between themselvessuitable bilateral parameters for thereconciliations they perform.

While these Best Practices are not intended tobe obligatory, they seek to harmonize thecurrent range of bespoke procedures andindividual priorities and create consistency andefficiency in the market. Generally, the OTCderivatives industry should move towardsadopting these guidelines which utilize pro-active collateralized portfolio reconciliation as atool to reduce operational risk and counterpartyexposure.

n 11 - Interest ProcessingIntroduction

All collateral cash balances pledged should earnaccrued interest as agreed and defined underthe terms of the ISDA CSA.

e 11.1: Settling Interest (StandardMonthly Interest Calculation)PrincipleInterest on the collateral margin balance isaccrued on a daily basis using the CSA agreedinterest rate and spread. All interest accrued willbe paid monthly to the party pledging collateral

or as mutually agreed by the parties. It isincumbent on the party receiving interest to raiseany differences in the amount received within 30days of receipt.

DescriptionAdvice of the amount to be paid will be sent onthe first business day of the month with actualdelivery occurring as mutually agreed by theparties. Delivery of the interest amount will be


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made to the pledgors original settlementinstructions. The following months startingbalance, interest rate and account spreadshould all be reconfirmed. Interest should not berolled into the principal balance unlessspecifically agreed by both parties.

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11.2: Flooring of Interest RatesPrinciple

At no point should the interest accrual (rateminus spread) drop into a negative figure. If thisoccurs the rate should be floored at zero.

DescriptionMany CSA agreements were written and agreedwhen it was not anticipated that interest rateswould reach extremely low levels. Howevermarket conditions have occurred where theinterest accrual formula could result in a

negative number with a collateral providerobligated to pay interest to a collateral holder.At no point should the interest accrual (rateminus spread) drop into a negative figure. If thisoccurs then the best practice is to floor theinterest rate at zero.

11.3: Including Accrued Interestupon Final Return of Collateral.PrincipleWhen closing a client relationship and returningcollateral, the full amount of collateral should bereturned, including any accrued interest.

DescriptionTo avoid having any future payable amount atthe end of a client relationship, when returningany collateral balance in full, all interest(capitalized and non-capitalized) should beincluded at the same time.

e 11.4: Interest Should beCalculated Using a Standard FormulaPrinciple

Absent specific wording to the contrary in theISDA CSA, interest should be calculated using astandard formula. The formula should be

(Principal Balance * (Interest Rate/100 ))/(360 or365) * number of days relevant to the currencyof collateral held.

DescriptionMarket practice is that interest should becalculated using actual days. The formulashould be (Principal Balance * (InterestRate/100 ))/(360 or 365) * number of days

relevant to the currency of collateral held. Alldecimals should be rounded to 2 places to avoidrounding issues.

11.5: Client CommunicationPrinciple

All requests for interest should include theinformation necessary for a client to be able toevaluate and agree to any interest amount.

DescriptionRequest for interest delivery should bestandardized around a single electronicmessage format. A list of fields to include in theinterest message are included in the Standardsfor the Electronic Exchange of OTC DerivativeMargin Calls .

If the interest statement is sent via e-mail, the

body of the e-mail should include the interestperiod, legal entity, amount of interest (payableor receivable), contact name/phone/emailaddress and wire instructions. The intereststatements should include: rate, daily principalamount, date, accrued interest amount and dailyinterest amount. The interest statement shouldbe included in the communication as anattachment.

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11.6: Interest CalculationPrincipleInterest should be calculated on a full monthbasis only unless otherwise agreed by the

parties.

DescriptionSome CSA's have been written with non-standard interest period calculations, such asinterest is to be calculated to the 20th day ofevery month. Language should be standardizedto allow interest calculations based on a fullcalendar month basis only. As a best practice,interest calculations should be from the first dayof the month to the last day of the month, withinterest accrued to the last day of the month.

n 12 - Tri-Party Reconciliation

IntroductionIn a Third Party custodial relationship, anunaffiliated bank, broker dealer or other partyoperates under agreement with one of the two
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Best Practices for the OTC Derivatives Collateral Process

counterparties and simply provides typicalcustody and safekeeping services.

In a Tri-Party custodial relationship, anunaffiliated bank or other party operates under athree-way contract between it and the two

derivative counterparties. Among other duties,the tri-party agent releases collateral to each ofthe counterparties subject to pre-definedconditions.

Best Practice 12.1: Collateral BalanceReconciliationPrinciple

Where collateral movements are effected in aThird Party or Tri-Party system, a reconciliationof collateral balances should be performedbetween the parties on a daily basis..

DescriptionWhere the pledged collateral balance, whethercash, securities, letter of credit etc, is held by aThird Party or Tri-Party, daily balancereconciliation should be performed to ensure riskexposure is minimized..

References

ISDA Paper: Standards for the Electronic Exchange of OTC Derivative Margin CallsPublished November 2009

ISDA Paper: 2009 Collateral Dispute Resolution Procedure (DR Procedure).Published September 2009

ISDA Paper: Collateralized Portfolio Reconciliation Best Operational PracticesPublished December 2009

Documents

ISDA Best Practices for the OTC Derivatives Collateral Process