Collateral Optimization - The Next Generation of Collateral Management: A Sungard Whitepaper


Collateral Optimization: The Next Generation of Collateral Management

A Sungard Whitepaper

This month Sungard have released a white paper on optimising collateral and improving the way collateral is managed. To find out more, download the whitepaper.


The new importance of collateral management

The post-crisis banking regime has obliged financial institutions to make connections between previously distinct classes of risk. The traditional view of a sequential flow of risk has been replaced by an infinite, interconnected loop with collateral and liquidity at the center alongside risk weighted asset considerations (Figure 1).

In particular, change is being driven by the central clearing mandate introduced by the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act in the United States, together with upcoming rules of Basel Committee on Basel Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) on margin requirements of non-centrally cleared derivatives.

Margining effectively transforms counterparty credit risk into collateral and hence liquidity risk. The new regime creates a symbiotic relationship between collateral management and the management of risk weighted assets (RWAs), e.g. netting and collateral is much more recognized by the forthcoming Standard Approach for Counterparty Credit Risk (SA-CCR, BCBS 279).

The industry is addressing these regulatory-driven changes through a clear trend towards the centralization of collateral management functions. Typically, the first step towards enterprise collateral management is the creation of a central inventory of assets that may be deployed as collateral, combined with a centralized view of collateral requirements across the trading book and multiple asset classes.

Across the industry, collateral management as a function is changing from an operational cost center into a profit center located in the front office.

In fact, some practitioners define collateral as a new asset class that will ultimately be traded on organized markets.