A method of mitigating or settling counterparty credit risk arising from movements in the mark to market value (MTM) of a derivative or similar contracts in favor of either party. Otherwise, the receiving party would still be exposed to the risk associated with the paying counterparty.

According to the collateral to market model, movements to market value would require the out-of-the- money party (the party holding the loss position) to periodically transfer collateral with an amount equal to the cumulative MTM value to the in-the-money party (the party holding the gain position). Such variation margin (VM) payments would be accounted for as collateral. The variation margin payments on swaps is treated as collateral (i.e., the party posting collateral would record a receivable for the eventual return of the collateral).

Centrally-cleared derivatives (cleared derivatives) can be structured and documented as collateralized-to-market (CTM derivatives) or settled-to-market (STM derivatives).