Robust collateral management: What is it? Why is it important? How to get there!


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Financial institutions around the world need to get their collateral management processes ready for the challenges ahead. The goal is to establish robust collateral management. But what is robust collateral management - and how can institutions get there?

Find out even more in our associated whitepaper, available for free on our website:

We are also hosting a series of associated webinars to introduce this topic in an interactive session. You may register for free on our website:

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Robust collateral management: What is it? Why is it important? How to get there!

  1. 1. 1managementWhat is robust collateralmanagement? Why is it important?How can it be achieved?Robust collateral
  2. 2. Agenda1Why todays CM processes are notready for the challenges ahead3 What are the alternatives to achieving robust collateral management?4 What is the best approach for coming to a decision?2 What is robust collateral management?
  3. 3. 3Global OTC derivatives reform impacts collateralmanagement■ Margin levels increasedramatically through initialmargin requirements■ Margin call volumes increase toat least daily per clearing brokeror even intraday at clearinghouses■ High pressure on liquiditymanagement■ High pressure on operationalefficiency
  4. 4. 4Bilateral collateralization will become mandatory■ Global draft standard from BCBS &IOSCO■ Mandatory exchange of collateral fornon-centrally cleared deals■ Variation and initial margins■ QIS expects initial marginrequirements of EUR 700bn
  5. 5. 5Shortage of collateral supply ahead Collateral crunch■ Increasing Basel III capitalrequirements will tie eligiblecollateral■ Re-hypothecation constraints limitflow of collateral■ Sovereign debt crisis decreasesoverall volume and value ofcollateral assets■ Increased demand meets shortageof supply  Collateral crunch
  6. 6. 6Existing collateral management processes typicallyshow a variety of inefficiencies■ Cash-only, highly fragmented andmanual collateral managementprocesses■ No enterprise wide inventory ofassets and agreements■ Proprietary MS Excel frameworksinstead of enterprise collateralmanagement systems■ No possibility for what-if scenariosand forecasting■ Inconsistent and out-datedderivatives pricing capabilities
  7. 7. 7Checklist for assessing an institutions readiness forthe challenges ahead1Are my processes and systems ready to handle collateral management of thecleared OTC derivatives business?2Do my processes and systems support posting of securities as collateral?3Do I have an overview of the entire inventory of eligible assets to be posted ascollateral across all business units and entities?4Is collateral management driven by the front office?5Do I have collateral optimization strategies in place?6Can I forecast collateral demand and consider this within my liquidity plan?7Are the processes almost automated and supported by a technology?Yes NoYes NoYes NoYes NoYes NoYes NoYes No
  8. 8. Agenda1 Why todays CM processes are not ready for the challenges ahead3 What are the alternatives to achieving robust collateral management?4 What is the best approach for coming to a decision?2 What is robust collateral management?
  9. 9. 9Robust collateral management enables a 360° view■ Know all collateral assets availableacross all business lines■ Match collateral available againstcurrent and projected cashflows outof every collateralized transaction■ Consider collateral that has alreadybeen pledged / transferred■ Based on the 360° view – support allprocesses around collateralmanagement
  10. 10. 10Robust collateral management has to cover manydifferent aspects■ Collateral managementconsists out of manydifferent use cases –requiring lots of differentfeatures and functions■ The next slides will focus asubset of very importantaspects of robust collateralmanagement and thechallenges associated withthemCollateral Management Inventory Trans‐forma on Margin calcula on Op mi‐za on Disputes Fore‐cas ng Collateral management Tracking Valua on 
  11. 11. 11Enterprise-wide collateral asset inventory■ Eligibility of collateral assets variesstrongly by counterparty and type ofcontract■ In general a huge variety of assets canbe used as collateral■ Typically assets are not managedin a common pool – instead theyare spread across silos and systems■ Establishing a central asset inventory isa key challenge – requiring robust datainterfaces
  12. 12. 12Collateral agreements inventory■ Collateral agreements involve lots of paperworkwith hundreds of terms & conditions■ Could also be seen as complex derivative withunderlying basket of derivatives and exoticoptions■ Rarely represented in systems in a structuredway■ Robust CM requires systems capable ofcapturing agreements with all complexity in astructured way■ Additional challenges are quality assuranceand keeping them up-to-date
  13. 13. 13Collateral tracking■ Challenge to know exactlywhich asset has been given orreceived as collateral for whichcollateral agreement at anygiven point in time■ Collateral transactions may notbe settled yet■ Robust collateral managementneeds to be able to lookthrough the whole settlementprocess
  14. 14. 14Collateral optimization strategies■ Collateral optimization involves a broadrange of measures aimed at minimizingcosts■ Consider exchange traded derivativesover OTC derivatives for certain use-cases■ Seek increased margin efficiencythrough cross margining■ Utilize re-hypothecation of collateralreceived■ Deliver cheapest collateral possible
  15. 15. 15Cheapest to deliver optimization■ Utilize algorithms to proposecollateral movements thatresult in the cheapest-to-deliver collateral■ Requires a very granularprice-tag for each collateralasset■ Should also consideradditional preferencesthrough flexible rules enginesOptimizationAlgorithmCheapestto delivercollateralmovementproposalEligibilitycriteriaAssetinventoryFundingprice tagsCurrentallocationMargin callsContractinventoryMarket data
  16. 16. 16Valuation■ Precise and quality assured marketdata and well calibrated pricingmodels■ For pricing of collateral assets as wellas underlying collateralized derivativecontracts■ To validate incoming and generateoutgoing margin calls■ What-if simulations for robustliquidity management■ Challenges in initial margin calculationand OIS discounting
  17. 17. 17Real-time front office support■ Robust collateral management isnot a pure back office function■ Front office must understandcurrent collateral situation andcollateral implications of any frontoffice activity■ Pre-deal analysis is a must toconsider implications in pricing anddecision making■ Can also assist in finding the leastexpensive settlement location
  18. 18. 18Flexible workflow support■ Challenging and frequently changingenvironment■ A robust collateral management solutionmust be flexible enough to support newworkflow requirements■ E.g. processing bilateral collateral agreementsis very different from processing margin callsfrom a clearing broker or CCP■ Currently no common standards – butexpected to be established over time■ A flexible solution allows to adapt to changes atlow implementation costs
  19. 19. Agenda1 Why todays CM processes are not ready for the challenges ahead3What are the alternatives to achievingrobust collateral management?4 What is the best approach for coming to a decision?2 What is robust collateral management?
  20. 20. 20In general there are two approaches:In-house vs. outsourced■ Challenge one lies in comparing pros and cons of each approachand align them with the institutions specific requirements■ Challenge two lies in comparing the actual system and serviceproviders
  21. 21. 21Challenges of an in-house approach■ Requires decent investment intotechnology and resources■ Operational expertise is essential –knowledge gaps need to be closed byeither recruiting experts or throughtraining■ Selection and implementation of theright technology is a complex project■ Result is independence, flexibility and ifdone right a competitive advantage
  22. 22. 22Challenges of an outsourced approach■ Outsourcing to a 3rd party is possibleeven though the function is missioncritical■ Attractive where resources and budgetsare tight■ Quicker time to market is possible –although there are still lots ofintegration issues to be solved■ Challenge to find a trustworthy partner■ No competitive advantage
  23. 23. Agenda1 Why todays CM processes are not ready for the challenges ahead3 What are the alternatives to achieving robust collateral management?4What is the best approach forcoming to a decision?2 What is robust collateral management?
  24. 24. 24First you have to know your requirements■ Requirements for a robustcollateral management need to bealigned with the institutions futurebusiness model■ Requirements are the basis forcomposing a questionnaire forsystem and/or service providers■ Follow a proper requirementsgathering process and ensurestakeholder commitment
  25. 25. 25Compare solutions and services through aprofessional evaluation process■ Thorough preparation and planning phase■ Professional RFI (request for information) phase with a long list ofvendors■ Intensive phase of demos and workshops with a mid list ofvendors■ Solid business case development with cost / benefit analysis andformal RFP (request for proposal) process with a short list ofvendors■ Presentation of the results and final decision making
  26. 26. 26FAST TRACK – Design a plan of action within just 4days■ FAST TRACK for robust collateralmanagement is FOXEYEs uniqueapproach■ Asses the status-quo, identify gaps anddesign a plan of action within just 4days■ Find further information and adetailed brochure on our website■ Get in touch with us for an initialconsultation
  27. 27. 27Download our whitepaper andregister for our webinar■ Find out more about robust collateralmanagement in our free whitepaper:■ Get in touch with our experts byattending the associated webinar:
  28. 28. 28We would like to invite you to engage with our experts via onlinebusiness networks■ Join the online group FOXNET – The Community for Front OfficeXperts on LinkedIn or Xing to collaborate with us on hot topicsand our publications■ Or simply visit or follow our website at www.FOXEYE.netThank you!
  29. 29. 29Phone: +41 (0)41 - 66 299 10Fax: +41 (0)41 - 66 299 11Mail: office@foxeye.netWeb: www.foxeye.netAGFOXEYE AG - The Frontoffice XpertsMorgental 26CH-8126 ZurichSwitzerlandGERMANYBockenheimer Landstraße 17/19D-60325 Frankfurt/MainGermanyAUSTRIABismarckstr. 9A-4020 LinzAustriaSPAINCalle Las Lonjas 4E-38400 Puerto de la CruzSpainUSA100 Manhattan AvenueSuite 1013Union CityNew JerseySINGAPORE80 Raffles Place#16-20 UOB Plaza 2Singapore 048624