How does a company pledge collateral?
Generally speaking derivative contracts are documented under ISDA Master Agreements, which mostly include a Credit Support Annex. The CSA regulates the posting of collateral across all the derivative positions between two firms. AIG be a different case though and may not have had CSAs in place with its counterparties and they will have relied on bespoke collateral transfer provisions in each confirmation. Very roughly, how a normal CSA works is that all open interest rate, currency, credit etc derivative positions between two counterparties are netted out and a single number is produced. This number is (more or less) the net amount that one party would have to pay the other if all the contracts were terminated at that time. This amount is the “Exposure”. If the value of collateral that has previously been transferred by one party to the other is less than this amount, they will have to transfer more. If the value is greater, they will be due some back. As the value of the derivatives a
