1. INEUM Kurt Salmon QUADRICHROMIE
INE_06_0409_Logo_CMYK
14/12/2010
24, rue Salomon de Rothschild - 92288 Suresnes - FRANCE M100 Y100
Tél. : +33 (0)1 57 32 87 00 / Fax : +33 (0)1 57 32 87 87
COLLATERAL MANAGEMENT
Web : www.carrenoir.com
M65 Y100
Ce fichier est un document d’exécution créé sur
Illustrator version CS3.
K100
How collateralization contributes to mitigating risks
while fulfilling increased regulation requirements?
Understanding the
In an increasing competitive business environment, the temptation to take
more risks is higher. Regulation initiatives following the credit crisis give new
perspectives for the collateral management function. It can be used as reliable
risk mitigation, thus helping the financial industry with additional capital reserve
precise mechanisms
strategies. At the same time, technological evolution and SWIFT enhance straight
through processing of financial flows, improving market liquidity.
Investment banks or other securities trading environments have collateral
agreements with thousands of counterparties. Collateral valuation is based
on an agreed value plus a margin known as “haircut”. Margin calls are made
frequently based on mark-to-market potential future exposure and/or value-at-
through which
collateralization
risk calculations. Collateral management teams are usually located close to the
fixed income trading, derivatives or equities business silos. Developing a cross
silo collateral management team would provide wide opportunities and lower
implementation complexity. External assistance is therefore advised to conduct a
impacts credit risk.
global and transversal approach involving all players.
An accurate knowledge of the interactions between the different business lines
running the bank (Customers & Markets, Product Management, Treasury, Risk
Management, etc…) is a prerequisite for the collateral management process
design and implementation. For instance, collateral does not have the same
function for collateral givers as for collateral takers. In the first case, it are pledged
assets (bonds, OTC, cash, loans…) and in the second one, it generates revenues at
low risk doing prudent cash management. An institution with an integrated, well-
run collateral management function will have a competitive edge in the market
place. Mastering the practice makes it possible to use an independent Tripartite
agent offering a range of services from straightforward repos to tailored re-use
structures, on a single platform. Centralised facilities will reduce the cost basis
and improve the competitive position.
Impact of collateralization on credit risk
Credit A positive balance of collateral currently held may offset a positive
Exposure mark-to-market value if default were to occur now, assuming the Debtor transactions Creditor
MTM collateral is valid and enforceable
Potential A positive balance of collateral held at some future date may offset Credit Risk
future a positive mark-to-market value if default were to occur now,
Compensation
credit Basel III
assuming the collateral is valid and enforceable
exposure
Default Pledged /
Pool of Collateral
Default Not affected by collateral
probability
Marketable Assets
• Bonds
“Two Although the probability of default of the counterparty is not • Derivatives
Name” reduced by collateral, the overall compound default probability for • Cash
compound the package of transaction and collateral is smaller than the base
probability default probability for the counterparty Non Marketable
Assets
Credit claims
Recovery May be increased by collateral held, assuming the collateral is valid
rate and enforceable
Incorporates recovery rate, and therefore may be reduced by the
Loss given beneficial impact of collateral on recovery rate
default Reduced by collateralization
Agreements
GMRA, ISDA, Tripartite …

2. hedge
funds
Derivatives Securities
Repos /
trading lending
prime
brokers
hedge
funds
Derivatives Securities Unique Collateral Management desk
Repos /
trading lending
prime
Now
brokers
Collateral Collateral Collateral Collateral
Management Management Management Management • More transactions and deals
desk desk desk desk offers the opportunity for
margining.
Before • Statutory call for upfront
security.
• Request no longer based on
• Deposits of : the credit rating of the coun-
• Securities, terparty only.
• Bonds, • Collateral concerns several
• Cash deposits business lines
• Request mainly based on the • Value of the collateral involved
credit rating of the counter- now runs into billions of Euros
party. spread across many thousands
• Collateral used to concern one of individual trades
or two business lines
Presentation of the offer
To support the collateral management needs of market participants,
A comprehensive
Kurt Salmon has developed a Global Liability Management market
offer based on a transversal solution approach and in depth knowledge service covering a
large spectrum of
acquired through customer engagements.
We offer our customers:
• Assessment and implementation of best practices;
• Transversal analysis of liability management for Assets, Treasury,
risks to help financial
Payments (Target2, SEPA, PSD), Risk and Liquidity Management;
• Credit and Securities Lending expertise with respect to risk exposure institutions build and
follow-up state of the art
and revenue opportunity analysis;
• An experienced and knowledgeable workforce to realise your business
targets and project deadlines;
• Provision of time management methods, benchmarking and decision
support. Collateral Management
And specifically:
• Business expertise and knowledge of “best practices” to assist you
Programmes.
with the production of business and technical requirements;
More information: Our assets:
Our collateral offer is based on:
Lilian Citerneschi • Global understanding of the
• Teams working with methods and able to understand Front to Back Manager FSI
Mail : lilian.citerneschi@kurtsalmon. Collateral Management process.
office organizations and processes;
com • In-depth of knowledge Securities
• Strong compliance skills with BASEL III perspectives; Tel. : +352 661 321 470
Financing products (Tripartite,
• Banking and IT knowledge that help along the decision process to Pooling, Securities Lending, etc.)
Herwig Temmerman
produce project frameworks, proposing adapted governance, drawing Partner • Implementation of scalable
roadmaps and taking care of the PMO. Mail : herwig.temmerman@
kurtsalmon.com solutions adapted to trading desk
• A flexible and personalized process of consultancy; Tel. : +352 26 37 74 1 requirements
• Our confidential approach and proximity with our clients; • Consulting methodology to
• Our International network of competences. build and follow-up complete
transversal programmes.
Ineum Consulting and Kurt Salmon Associates have joined forces to create an integrated and global organization, operating
across five continents under one single brand: Kurt Salmon. Our clients draw from the deep industry and functional experience of
our 1,600 consultants in strategy, organization and management.
We are convinced that today’s increasingly complex environment calls for more than just another consultant. As trusted advisors,
we work at your side to design then drive strategies and solutions that can make a lasting and meaningful impact. Our commitment
is to bring measurable results to our clients ; we call it tangible excellence.
Kurt Salmon is a company of Management Consulting Group (MMC - London Stock Exchange)
www.kurtsalmon.com