How do threshold and MTA combine to affect collateralized exposure?

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AcadiFi · Accepted Answer

Threshold and MTA together create a piecewise structure that leaves residual unsecured exposure and reduces call frequency. The threshold is the maximum uncollateralized exposure allowed before any collateral is required. MTA is the minimum size of any single collateral transfer — it exists to reduce operational burden from tiny daily transfers. For your $3M threshold, $500K MTA CSA with Orion Fairbank Holdings, if current MTM in your favor is $2.8M, no call because below threshold. If MTM rises to $3.4M, required collateral is $0.4M; this is below the $500K MTA so no call happens. If MTM rises further to $3.9M, required collateral is $0.9M; this exceeds MTA so you receive $0.9M collateral. The net uncollateralized exposure sits somewhere between $3M (threshold only) and $3.5M (threshold plus MTA) at the point just before a call triggers. During the margin period of risk, MTM can drift further, adding to residual exposure. Effective peak PFE is approximately threshold + MTA + MPR-diffusion term. For your CSA, if 10-day MPR diffusion is $2M, peak PFE sits around $5.5M — about 10x higher than a zero-threshold zero-MTA CSA would produce. Most sophisticated banks push for zero thresholds on risky counterparties and use MTA purely for operational efficiency ($100K-$500K). Rating triggers sometimes reduce threshold dynamically — e.g., threshold drops to zero if counterparty is downgraded below BBB.

How do threshold and MTA combine to affect collateralized exposure?

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