Collateral Management

Nowadays, many banks will not trade with counterparties unless an appropriate collateral agreement has been put in place.

Some motivations for taking collateral as listed in the ISDA Margin Survey 2001 are as follows:

  • Credit risk reduction
  • Regulatory capital savings
  • Increased competitiveness
  • Improved market liquidity
  • Access to more exotic business.

Many definitions of Collateral Management refer to a Legally watertight, valuable liquid property supporting risk. This definition is quite good as it encompasses a lot of the required features for an effective risk reduction, or a reduction of the risks taken. It has to be legally watertight so you can own it, valuable so it is worth something and liquid so you can sell it.

Collateral management incorporates among other things:

  • The recording of collateralised relationship
  • Monitoring customer exposure and collateral received or posted based
  • Call for margin as required
  • To transfer collateral when a margin call has been made
  • Deal with failure of deliveries
  • Pay interest on cash collateral and to monitor its receipt.

ObjectLab has delivered such a system for a big European Bank with operations on 3 continents.

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