I also noted that when banks trade credit risk using new instruments such as credit derivatives or CDOs, they must take care to limit any counterparty credit risk that might result. Banks commonly rely on collateral to mitigate counterparty credit risk on over-the-counter derivatives. Credit derivatives are no exception.
Also, banks universally require their hedge fund counterparties to post collateral to cover current exposures and, with some exceptions, to cover potential exposures from future market movements.