The Margin Call is the primary mechanism which ensures adequate collateral is posted during the life of a deal.  Occasionally counterparties may disagree on whether a margin call is appropriate, or the amount of collateral requested.

Margin Call mechanics

 1) All trades are marked to market (daily, weekly, monthly).
 2) All collateral is marked to market.
 3) Net collateral requirement is calculated internally by each party
 4) Credit risk exposure is compared to a pre-defined acceptable exposure level.
 5) A margin call is made to counterparty if exposure limit exceeded.
 6) Counterparties net their collateral calculations (if both have posted / received collateral from the other).  Otherwise, the
 party receiving a margin call either accepts the call on its face or analyzes it and determines how much needs to be posted by looking at  market prices, collateral agreements, etc.
 7) The counterparties come to an agreement on how much needs to be posted.
 8) The undisputed portion of collateral required (imbalance) is posted by the losing counterparty to the winning counterparty.  The disputed portion (if any) may be negotiated.
 9) Collateral posting settles T+1 (next normal business day).  This may take longer for non-standard collateral or international transactions.

Collateral Disputes

There are several types of collateral disputes which occur most frequently. These include:

- Ineligible collateral / collateral recharacterization:  The losing counterparty attempts to post securities having less quality than required, or the quality of the collateral has dropped below the required threshold (e.g. an investment grade bond has dropped to B-rated and is no longer eligible).

- Payment delays

- Valuation disagreements:  Curves or prices may be captured at different times, from different data sources, using different price samples, or the theoretical valuation done using different valuation models or settings.

- Portfolio mismatches: Missing trades are not included in the portfolio which creates net exposure calculation differences.  This is quite common, especially where the Front Office has failed to properly enter trades at one of the counterparties.

Dispute Procedure

Resolving collateral disputes generally takes the following path:

 1) Check the collateral value using market data such as FX rates, interest rates, bond prices, etc.
 2) Make sure the Credit Support Annex (CSA) covers the specific securities or locations/branches in question.
 3) Check the net collateral requirement vs. thresholds (specific and general).
 4) Check rounding amounts (rounding up or down at a specified level of granularity).
 6) Perform price change analysis walk-through with counterparty.  This helps determine the source of the valuation issue over time.
 7) If the counterparties still cannot agree on the correct amounts, then implement formal dispute resolution procedures.  These should be governed by the appropriate CSA:
a) get additional external quotes (3rd party dealers, banks, valuation consultants, etc.)
b) get one or more appraisals done.

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