The Nature of the Counterparty Relationship in Bilateral OTC Derivatives

Abstract

Many parties in the derivatives markets have more than one trade with a given counterparty. The existence of these portfolios gives rise to issues of netting: when can we look at risk on a net basis, and when is it gross? This chapter is concerned with those problems and with the legal machinery that addresses them. In particular we look in some detail at the usual forms of documentation used for bilateral OTC derivatives trades.

Look at the two of us in sympathy with everything we see I never want anything, it’s easy you buy whatever I need But look at my hopes, look at my dreams the currency we’ve spent I love you, you pay my rent

Pet Shop Boys*