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The present work studies and analyzes general defaultable OTC contract inpresence of a contingent CSA, which is a theoretical counterparty riskmitigation mechanism of switching type that allows the counterparty of ageneral OTC contract to switch from zero to full/perfect collateralization andswitch back whenever she wants until contract maturity paying some switchingcosts and taking into account the running costs that emerge over time. Themotivation and the underlying economic idea is to show that the currentfull/partial collateralization mechanisms defined within contracts' CSA - andnow imposed by the banking supervision authorities - are "suboptimal" and lesseconomic than the contingent one that allows to optimally take in account allthe relevant driver namely the expected costs of counterparty default losses -represented by the (bilateral) CVA - and the expected collateral and fundingcosts. In this perspective, we tackle the problem from the risk management andoptimal design point of view solving - under some working assumptions - thederived stochastic switching control model via Snell envelope technique andimportant results of the theory of the backward stochastic differentialequations with reflection (RBSDE). We have also studied the numerical solutionproviding an algorithm procedure for the value function computation based on aniterative optimal stopping approach.

A stochastic switching control model arising in general OTC contracts with contingent CSA in presence of CVA, collateral and funding