Credit Risk Management Practice Exam

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What did the G20 establish in 2011 regarding non-clearable OTC derivatives?

Mandatory netting agreements
Bilateral collateral requirements
Standardized risk-free rates
Increased transparency measures

The correct answer is: Bilateral collateral requirements

The G20 established bilateral collateral requirements in 2011 to enhance the regulation of over-the-counter (OTC) derivatives. This was a crucial step in mitigating credit risk associated with these financial instruments. By requiring parties to post collateral against their derivatives positions, the G20 aimed to ensure that there were adequate financial resources available to cover potential losses from defaults. This approach helps to reduce counterparty risk, as the collateral can be used to mitigate losses should one party fail to meet its obligations. The emphasis on bilateral collateral agreements reflects a broader movement towards reducing systemic risk in the financial system and enhancing market stability following the financial crisis of 2008. As a result, having these collateral requirements in place can help to build confidence in the OTC derivatives market, ensuring that transactions can be executed with a greater assurance that risks are managed properly.