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1. What is Collateral Management? Collateral management is the process of two parties exchanging assets in order to reduce credit risk associated with any unsecured financial transactions between them. Such counterparties include banks, broker-dealers, insurance companies, hedge funds, pension funds, asset managers and large corporations.
European Securities Financing Regulation, the Collateral Directive, and relevant parts of the Bank Recovery and Resolution Directive. Clearing and Settlement Dermot Turing,2021-02-12 The post-trading industry is one in which financial firms make
gauge the current trends in the banking industry, mainly in Europe, in the three following areas: Collateral features focusing on nature and volumes, counterparty concentration and collateral pricing; Governance around collateral management; IT capabilities to retrieve information on collateral.
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- What needs to be optimized
- Financial resource constraints
- Data accuracy and timeliness
- The requirement
- Drivers of ineficiency
- Transparency constraint
- Siloed collateral management analytics
- Operational and infrastructure constraints
- Siloed settlement and post-trade infrastructure
- Fragmented structure
- Market structure frictions
- Manual allocation decisions
- Organizational constraints
- Cultural barriers
- Varying definitions of optimal
- Lack of incentive
- Capabilities to enable optimization
- Collateral optimization capabilities benchmarking
- Foundational capabilities
- Inventory management
- Requirements
- Eligibility
- Funding cost and funds transfer pricing
- Opportunity cost PnL
- Advanced capabilities
- What-if modeling and forecasting capability
- Optimization algorithm
- Algorithm-driven allocation
- Operational capabilities
- Depo and nostro rationalization
- Settlement infrastructure
- Asset servicing and corporate actions
- Operating model considerations
- Centralized
- Federated
- Hybrid
- Technology and infrastructure considerations
- How to accelerate realizing optimization goals
- A final word
- Jimmy Ryan
FIs have several financial resource constraints in need of optimization, with the binding constraints varying by firm. There is a broad set of levers to optimize the consumption of these resources. Collateral management, in its broadest definition, is a high-value set of levers that FIs can optimize to drive significant benefits. Buy-side and sell-...
Funding availability and cost Capital and risk-weighted assets (RWA) Liquidity and high-quality liquid assets (HQLA) (liquidity coverage ratio (LCR), net stable funding ratio (NSFR), internal stress testing) Leverage Regulatory lockups Internalization
Collateral optimization ineficiency is observed in and driven by two primary areas: the requirement (the amount to be funded) and the pledge (how the requirement is met).
FIs should look to optimize the channels through which they execute on a pre- and post-trade basis to enable decision-making on new trades in the context of the broader portfolio to reduce overall financial resource consequences. Opportunities exist to optimize the requirement by enhancing capabilities at the enterprise level in determining the tra...
Factors such as limited transparency and operational, infrastructure and organizational constraints are major drivers of optimization ineficiencies. An effective collateral optimization program needs to identify ineficiencies in PnL form and develop a deep understanding of the drivers. Without developing a detailed understanding of why the ineficie...
The transparency constraint can be attributed to a firm’s legacy approach to collateral management. Many FIs manage collateral across multiple groups separated by product or desk using inconsistent data and infrastructure. These siloed teams are left to develop their own toolkit to optimize solely the collateral within their remit.
Siloed collateral management functions and the resulting fragmented infrastructure limit the ability to view available inventory, requirements and eligibility at the enterprise level. Many FIs have upward of 10 organizations responsible for managing collateral and meeting funding requirements. Many of these groups lack basic analytics to identify o...
Operational and infrastructure constraints have been observed that limit a firm’s ability to mobilize collateral and execute on identified opportunities. In addition, several market structure frictions hinder the ability to optimize (e.g., settlement timing conventions). Infrastructure constraints that limit collateral mobility, such as settlement ...
Historically, financial institutions have developed settlement and post-trade infrastructure that is specific for a particular asset class, business, desk or market. As a result, the optimal position for specific collateral usage may lack the infrastructure and operational capability to be traded, processed or managed by the business or region with...
FIs with a highly fragmented depo and nostro structure often have a higher cost and complexity in their settlement and reconciliation process, undermining their ability to eficiently mobilize collateral. For many FIs, this fragmented structure is driven by a business architecture that is perceived to be eficient by allowing each desk and subdesk to...
There are industry and market structure frictions such as market open times, settlement cycles, client lockups and regulatory controls that can limit a firm’s ability to optimize. It is important for FIs to differentiate between true market structure frictions and internal frictions, such as timing lags and constraints to mobilize collateral across...
FIs have upward of 10 functional teams managing and optimizing collateral and funding. Many groups lack the systemic capability to select and execute collateral allocations, relying on “ofline” or manual processes. For these groups, collateral allocation decisions are made manually, with incomplete information and focus on operational expediency ov...
To achieve optimization, management across business lines needs to agree to the program’s objectives and understand the goal of optimizing for the enterprise. Migrating to an enterprise view requires the individual teams to redesign legacy processes and coordinate across functions. Mobilization of a cross-functional enterprise program requires a sh...
At many FIs, the siloed businesses and supporting operations functions lead to a culture of optimizing their desk constraint as opposed to optimizing for the enterprise. There are also dificulties scaling existing optimization processes from a desk to an enterprise level, as the constraints and data sets differ.
With the disparate ownership across organizations, some FIs have differing levels of focus on delivering optimal collateral and varying deinitions of what optimal collateral means. In some parts of organizations, there is a lack of appreciation for the need to optimize, differing levels of what is optimal, and competing binding constraints across d...
From an operational perspective, many individual teams struggle to adjust from their legacy processes or operationalize new technologies. Similarly, where operations teams are manually allocating collateral, there may be limited incentive to change their methods. It is important for leadership to agree to program strategy and effectively communicat...
Informed by our work with buy- and sell-side FIs, we show in the figure below the relative maturity of FIs’ collateral optimization capabilities across the industry. While not all FIs need to have a leading suite of capabilities to achieve optimization, the capabilities highlighted as “Foundational” and “Operational” are the primary areas for inves...
Optimization capability Lagging Industry benchmarking Leading Lagging Industry observations Leading Digitized collateral eligibility Enterprise inventory management Collateral funding requirements Fragmented requirements reporting by entity, business line and asset class Centralized collateral requirements view across the enterprise on near real ti...
Foundational capabilities form the groundwork for effective collateral optimization at the enterprise level. The data strategy and structure that FIs adopt to facilitate the consolidated enterprise view are essential investments. FIs can leverage initiatives such as collateral asset traceability, contract digitization and stress testing/forecasting...
FIs should maintain a consolidated view of enterprise-wide collateral and cash inventory, otherwise known as collateral sources and uses. Although an end-of-day consolidated inventory view is the baseline capability, FIs should ideally work toward near real-time analytics at the enterprise level with clear asset traceability, to understand the avai...
An enterprise-wide consolidated view helps FIs view all collateral and funding requirements across the organization. FIs should also include an operational flag as to who owns the requirement operationally and a risk flag to identify if this is a volatile or relatively stable need. Leveraging firm stress testing to support this information adds fur...
FIs should have at the enterprise level a consolidated view into contractual, regulatory or operational eligibility for all requirements to identify optimal collateral fill. Having the additional ability to overlay contractual rights with operational constraints on an asset class level enhances the ability to operationalize this data.
Assigning a cost of funding to all assets based on funding market prices and the firm’s secured or unsecured funding costs is a necessary capability. Consideration of each asset’s funding cost will inform optimal allocation and measure the cheapest to deliver assets.
In order to determine the ineficiency in the collateral portfolio, FIs should have the ability to combine the base capabilities at an enterprise level. FIs with the ability to layer in the root cause behind the ineficiencies can derive a plan to adjust the management approach and associated infrastructure to realize the optimization goal.
The advanced capabilities are those that FIs can leverage to drive greater optimization, which enable FIs to sustainably achieve optimization of their collateral and funding portfolio on an ongoing basis.
FIs should be able to project the collateral need and perform what-if analysis on trading activity to determine the optimal venue and counterparty for trade or portfolio of trades. Leading FIs have the capability to analyze both pre-trade (e.g., best execution) and post-trade (e.g., compression) analysis. Forecasting capabilities of leading FIs ext...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Manager jimmy.ryan@ey.com EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders...
Collateral is intended to limit a lender’s exposure to a borrower’s credit risk. The amount of collateral received by the lender includes a margin or haircut based on the quality of the collateral to protect the lender if the borrower defaults. This means the market value of the collateral will exceed the amount of the loan.
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Jan 1, 2014 · We introduce a framework to analyse the supply and the demand of collateral internally originated by the banking activity, the tools to manage both and the targets that should be aimed at.
People also ask
What is collateral management?
When did collateral management become a business function?
What is collateral & how does it work?
What is the market standard for collateral management?
Collateral is an asset that’s been pledged as security against credit exposure. Secured loans are supported by collateral; unsecured loans are not. Taking collateral does not make an otherwise bad borrower a good one.
