It stands for collateral to market or collateralized to market contract; a derivative or similar contract that is “collateralized to market” for mitigating or settling counterparty credit risk arising from movements in the mark to market value (MTM) of the contract that may be in favor of either party. Otherwise, the receiving party in the contract 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).

Upon close-out of the contract, the non-defaulting counterparty may set-off (where the legal rights and obligations support this right of set-off) collateral received from the defaulting party against amounts it owes to that party in respect of the contract’s MTM value.