An acronym for settle-to-market; a settlement mechanism that treats variation margin (MV) at central counterparty credit (CCPs), related to credit derivatives and similar contracts or transactions involving credit risk, as settlement instead of collateral. This mechanism reduces leverage ratio costs and consequently can help decrease regulatory capital charges.
For settled-to-market derivatives (STM derivative), the variation margin transferred is treated and recorded as a legal settlement of the derivative contract but not as a transfer of collateral- i.e., the variation margin legally settles the outstanding exposure. However, it does not make any other change or reset of the contractual terms of the derivative. For example, STM interest rate swap contracts can be structured in such a way that all of the calculated outstanding exposure for the contract is settled daily and the outstanding exposure of the contract is reset to zero daily. Amounts due and payable are extinguished by payment.
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