Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 26 benefits of multilateral netting, centralized collateral management, standard margining, and, in most cases, a credible guarantor backing events of default. Multilateral clearing may reduce collateral requirements by as much as 75—90%. It does this by simply advancing the benefits of bilateral netting to a larger grouping of counterparties. In clearing, a participant’s credit exposure to counterparties in traded contracts is replaced, in whole or in part, by credit exposure to the clearing entity. The result is that the net credit or liquidity exposure of an active participant is more closely aligned with its market risk, or the risk carried by the overall portfolio, and will benefit from the netting of all positions. The power of multilateral clearing is unmatched, and must be embraced by the industry. The following example of multilateral netting, presented in Figures 3 and 4, is based on scaled trading book data involving five counterparties. It illustrates the benefits of multilateral netting by presenting a static analysis of how exposures are netted. Figure 3 shows the exposures without netting while Figure 4 shows the exposures with netting. The arrows show the direction of credit risk imposed, with the first number in brackets representing the current MTM amounts owed and the second number showing the counterparty VaR. Only the first number comes into play in the static analysis. Figure 3. Exposure without Multilateral Netting (Source: Analysis by Tractebel and Strategic Decisions Group) A B C D E ( 3 ,1 ) ( 7 ,3 ) ( 3 0 ,2 ) ( 4 ,5 ) ( 1 3 ,1 ) ( 8 ,1 ) ( 6 ,0 .7 ) ( 1 7 ,8 ) ( 4 4 ,2 ) ( 3 9 ,4 ) K e y ( $ m illio n s ) ( M T M P o s itio n , 1 D a y V a R ) G u a r a n ty E x p o s u r e ( $ m illio n s ) $ 3 0 .0 $ 1 2 .0 $ 3 7 .0 $ 4 4 .0 $ 4 9 .0 $ 1 7 2 .0 A B C D E T o ta l G u a r a n ty E x p o s u r e ( $ m illio n s ) $ 3 0 .0 $ 1 2 .0 $ 3 7 .0 $ 4 4 .0 $ 4 9 .0 $ 1 7 2 .0 A B C D E T o ta l