Protecting Collateral Against Bank Insolvency Risk--Part I

Hedge funds transfer billions of dollars to their trading counterparty banks and their affiliates to collateralize their obligations under derivatives transactions, and most of this collateral -- referred to as initial margin, upfront collateral or the Independent Amount in an ISDA Credit Support Annex (CSA) -- remains with the bank counterparty without regard to the mark-to-market value of the trades.