Swaps Collateral

One of the major risks with swap contracts is counterparty risk, that is, default by the party on the other side of the contract. Even though the loss from an interest swap contract in the event of default is only the difference between the two payments, this can still result in a negative impact on the remaining party. The Dodd-Frank Act requires that the CME Group and other swap clearinghouses must now require collateral from both swap parties similar to the collateral provided in futures trading. The intent of the collateral is to reduce the risk of default and limit the impact in the event of a default. In order to allow the industry more time to resolve technology problems, the implementation of the collateral rule has been delayed until January 14, 2013.