Summary

The majority of sovereigns do not post collateral to support their use of over-the-counter (“OTC”) derivatives1. As a result, dealers regularly have credit exposure arising out of these contracts which is often hedged with the sovereign Credit Default Swaps (“CDS”), and interest rate and foreign exchange swaps and options. This process has been of particular concern in Europe because of the possible ban on the use of sovereign CDS. To assist in highlighting this and other concerns arising out of the practice not to collateralize OTC derivatives, two associations2 (“the Surveying Associations” or ”SAs”) conducted a survey of dealers earlier this year, regarding their OTC derivatives exposure to European Sovereigns (“ES”).