You value your derivatives with a client at Rs 37 crore owed to you; the client says Rs 25 crore. The collateral agreement has a Rs 10 crore threshold and no collateral is held. What do you call, what is disputed, and what happens if the client fails to post?

The bank calls Rs 27 crore; Ferrovane's own valuation implies Rs 15 crore, so Rs 12 crore is disputed. Ferrovane should post the undisputed Rs 15 crore today. Until the Rs 12 crore is settled, the bank carries Rs 22 crore unsecured: the Rs 10 crore threshold plus the disputed slice. If Ferrovane fails to post even the undisputed amount, that becomes a default under the agreement once notice and grace periods pass.

A threshold is like the excess on car insurance: the first slice is yours to carry, and only exposure above it is covered. The call is exposure minus threshold, made only if it clears the minimum transfer amount. On the bank's valuation that is 37 minus 10, Rs 27 crore. On Ferrovane's it is 25 minus 10, Rs 15 crore. Both are far above the Rs 1 crore minimum transfer amountThe smallest collateral movement the agreement requires, so tiny calls are not made every day., so both are valid calls, and the difference between them, Rs 12 crore, is the dispute.

Work from the cheapest explanation to the most expensive. First reconcile the trade population: most large disputes are a trade one side has booked and the other has not, or a trade already matured on one side. Then compare trade by trade and sort the differences by size. Then check the inputs behind the largest ones: curves, volatilities, the valuation cut-off time. A dispute is usually a data problem before it is a valuation problem. Suppose reconciliation finds a Rs 5 crore swap that Ferrovane never booked but did confirm, and a Rs 7 crore gap on the options from different volatility inputs, split down the middle after both sides take market quotes. The agreed exposure becomes Rs 33.5 crore, and Ferrovane owes a further Rs 8.5 crore on top of the Rs 15 crore already posted.

Then the dispute is no longer the issue. Failing to post an undisputed amount is a failure to transfer, which becomes an event of default once the bank has given notice and the grace period in the agreement has run. At that point the bank can terminate the whole portfolio and claim the close-out amount, and with nothing held it is exposed to the full Rs 37 crore. Risk does not wait for that date: the credit officer is told on day one, new trades with Ferrovane are stopped, and the credit limit and internal rating are reviewed, because a trading house that cannot find Rs 15 crore is sending a liquidity signal. Say the limit too: all of this depends on the wording of this particular agreement, which risk should read rather than assume.