Many rating triggers work by tying the threshold, the amount of exposure left uncollateralized, to the rating. When the rating falls, the threshold shrinks, and the same market value requires more collateral1.

Some of AIG's CDS contracts required AIG to post collateral if its rating fell below a set level, and others lowered the threshold. The downgrades of September 15, 2008 created a need for about USD 20 billion for collateral calls and termination payments2.

AIG's first collateral calls came not from a rating trigger but from the fall in the market value of the reference CDOs. The rating triggers added to AIG's difficulties after it was already under strain3.

Notes

  1. Report of the Congressional Oversight Panel, p. 218 (PDF p. 226). The report defines a ratings trigger and gives examples in which a lower rating reduces the threshold. ↩

  2. Same report, p. 218 (PDF p. 226) and p. 54 (PDF p. 62). The USD 20 billion for September 15 cites AIG's Form 10-K. ↩

  3. Same report, p. 219 (PDF p. 227). Most collateral calls from June 2007 arose from the fall in the market value of the reference securities. ↩