The underlying commercial reason for Thresholds is that often parties will be willing to take a certain amount of credit risk to each other (equal to the Threshold) before requiring collateral to cover any additional risk. Banks, in particular, are in the business of extending credit and may (to some degree) think about a Threshold as being similar to the idea of extending a loan – both are forms of unsecured credit exposure.
When considering the operation of Independent Amounts and Thresholds in practice, it is important to note two points:
- As can be readily seen, Independent Amounts and Thresholds tend to work in opposition to one another in relation to any specific party under an agreement, which is why a particular collateral agreement will typically employ one or the other in relation to each party.
- In respect of Independent Amounts, it is also obvious that if both parties are subject to an Independent Amount they will tend to cancel each other out, which is why a particular collateral agreement will require Independent Amounts from neither party or one party, but not both parties.
Some Thresholds will also vary based on credit ratings. As mentioned above, this may be resisted to avoid an obligation to post potentially large amounts of collateral at times of economic difficulty for the downgraded party. However, many … respondents … reported basing Thresholds on credit ratings in some circumstances, while 27% also based thresholds on credit default swap spreads in some circumstances.
For hedge funds, where Independent Amounts are often required, they will nevertheless have Minimum Transfer Amounts (rather than Thresholds) applicable to them. This avoids the need for a transfer of small amounts of collateral. (1)
Threshold in Election Law
Minimum level of support (number of valid votes or number of seats) that a party or list or candidate needs in order to gain representation in an elected body. The threshold is often expressed in the constitution or the electoral law as a percentage of the valid votes cast.
- Election Law
- Electoral Laws
- Electoral Legislation
- Market Review of OTC Derivative Bilateral Collateralization Practices. International Swaps and Derivatives Association – March 1, 2010
- Financial Risk
- Collateral Dispute
- Prime Brokerage
- Credit Risk
- Financial Risk
- Credit Support
- Collateral Asset
- Divergence Threshold
- Threshold Price
- Back-To-Back Letter Of Credit