This Practical Note provides an overview of collateral arrangements under derivatives transactions. Collateral is posted by one or both parties to the transaction to secure their obligations; it is essentially to mitigate credit risk. DIFC Law explicitly recognises the use of collateral arrangements and provides for their enforceability against the posting party independently of any insolvency process afoot.

Unless the context requires otherwise, all defined terms in this Practice Note have the meaning set out in the ISDA Master Agreement.

• A derivative is a financial product whose value is determined by reference to the price of an underlying asset or index (such as an interest or forex rate). Corporations will typically use derivatives as a treasury risk management tool. The most common risks are:

  1. FX i.e., fluctuations in the currency/ies a corporation earns income in,

  2. interest rate i.e., over-exposure to floating or fixed interest rates, and

  3. commodities i.e., increases in oil price when a corporation's energy consumption is high.