Evolution of collateral ‘management’ into collateral ‘optimisation’

Abstract

New regulations have forced an unpresented change in banking and financial
industries, following the Lehman crisis. One of the key areas impacted by
this is the collateral management function. There has been a fundamental
change of focus on key drivers of collateral management since introduction of
Master Agreement and Credit Support Annexes. Post Lehman crisis Market
behaviour in assessing creditworthiness and pricing, and monitoring risk has
changed significantly, leading to an increase of risk parameters banks need
to monitor and price overtime, introducing more complexity to managing
available resources. As a result, banks require a new type of capability and
framework to assess, quantify, control and optimise scarce resources.
Collateral management is no longer a reactive post trade exercise, rather a
key building block within the trade cycle to ensure resources are priced and
used as efficiently as possible. This paper examines the building blocks of
margining and collateralisation of derivative transactions and trends evolved
to mitigate systemic risk in capital markets, and the increased complexity
faced when optimising the need to collateralise derivative and repurchase
agreement (repo) business post new regulations.