Collateral management
The growth in collateralised transactions has for several years significantly outpaced the general rise in transaction volumes. Transactions between major financial institutions that were previously on an uncollateralised basis are increasingly being collateralised to reduce credit exposure and capital. The growth in hedge fund business, which is almost always collateralised, is also fuelling the development of collateral management.
Banks are responding to the growth in collateral management by enhancing their systems and risk policies. Collateral management is also moving from being a back-office operation to being a source of competitive advantage as banks develop cross product and cross agreement netting capabilities and actively manage their collateral portfolios.
We can help institutions to enhance their collateral management functions from an organisational, systems and risk policy perspective.
Publications
Client
Investment bank and prime broker
Location
UK and US
Client need
The client had embarked upon a major project to reorganise its collateral management function to create a central collateral utility to provide cross product reporting, netting and margining. This project had major systems, process, business and risk management implications. The project also involved the upgrade of the client’s collateral management system.
The client required subject matter expertise to work alongside more generalist project managers to assess the impact of the change on the business and assist in the management of the project. Project management and business analysis resources were also required for the upgrade of the collateral management system.
Our role
We provided a senior project manager and business analysts with expertise in collateral management.
Client
Treasury operation of retail and commercial bank
Region
Middle East
Client need
The client entered into margined FX and derivatives with its corporate client base. The client wanted to ensure that its credit policies, processes and systems for this business were in line with market practice.
Our role
We reviewed the client’s business processes, margining methodologies, policies and systems. We identified areas where the client fell short of best practice and reported these to the client’s management. We were subsequently engaged to draft a new collateral policy for this business.
Client
US Investment bank
Region
UK
Client need
The client aimed to re-engineer its collateral management infrastructure to meet (and ultimately exceed) market best practice. The scope of this initiative covered all of the bank’s collateralised product lines (OTC derivatives, repo, securities lending, futures & options, prime brokerage) and the end-to-end collateral process – from margin management to inventory management and the pledging of collateral.
Our role
We provided:
- Advice on market best practice across all areas of the collateral management process
- Analysis of existing environment and identification of system, process and organisational shortcomings
- Advice on the strengths/weaknesses of collateral management software vendors
- Strategic advice on functional and architectural design and future state operating model.
Client type
Wholesale division of European banking group
Region
UK
Client need
The client wanted to review the optimal organisation of its collateral management function, in particular whether the collateral management departments for derivatives, repo and stock borrowing should be combined.
Our deliverables
We performed a strategic and operational review covering processes, IT, human resources and cost considerations.
Client type
Investment bank and prime broker
Location
UK, US and Germany
Client need
The client had an active business with hedge funds in derivatives, securities financing and prime brokerage. It wanted to satisfy itself that its margin terms were in line with market practice. It was also planning to offer margining on a more sophisticated basis (for example VaR based margining) and wanted to know the practices adopted by its peers in this area and the changes it would need to make to implement a more sophisticated margining approach.
Our deliverables
We conducted a market intelligence survey to ascertain practices within competitor firms. We also surveyed the client’s hedge fund clients to ascertain their views on its margining levels and other aspects of its risk policy and service level.
We benchmarked the client’s current approach against its peers and recommended changes to its policies and methodologies to bring it into line with market practice. We also set out a roadmap for the implementation of more sophisticated margining methodologies.
Client
Pension fund manager
Region
Benelux
Client need
The client was in the process of upgrading its collateral management function, both from a systems and policy perspective. The client had produced a draft collateral management policy but wished to have this reviewed to ensure compliance with best market practice.
Our deliverables
Having held a series of meetings with senior client employees to ensure we fully understood the business, we reviewed the policy to identify areas of policy and procedures which could be improved and where the client fell short of best market practice.
Our findings were detailed in a report which was presented to management.