Project Description

The role of collateral management has undergone a material change in terms of focus and relevance. Originally mandated with a focus on mitigating counterparty risk by validating and making collateral calls to offset counterparty exposure, it is now inextricably linked to pricing and profitability. What was traditionally an operational process, has increased in complexity in an attempt to monetise collateral optionality by treating collateral as an intrinsic part of the valuation process.

This survey of the largest international banks highlights the rapidly changing collateral management environment. Although there are differences in implementation amongst the largest institutions, there is a high degree of agreement on best market practices.

Establishing consolidated collateral pools with a single view of the entire collateral inventory, enabling the use of collateral in an optimal way across all asset classes, is a market trend. However, our survey suggests this to be more of a work in progress rather than a completed task, with a high degree of variance amongst participants. Complexity is also increasing, along with the requirement for tools to manage increasing collateral demand. Efficient collateral optimisation is a complex process and traditional management processes need to be updated and automated. This increase in complexity and importance has led to re-organisation, moving responsibility away from traditional desks such as repo and treasury, towards xVA desks and specific collateral management groups.

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