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Managing Collateral:
Optimal allocation at the
heart of the business
Top Ten Challenges for
Investment Banks 2015
02
ManagingCollateral:
Optimalallocationatthe
heartofthebusiness
02
Managing Collateral: Optimal
allocation at the heart of the business
Regulatory changes and market developments have focused
banks’ attention on effective collateral management, both
for their own businesses and as a service to their clients.
As traditional operating models are challenged by low
margins and significant regulatory change, the optimisation
of collateral assets is part of a wider focus on resource
allocation across the whole investment banking industry.
Most investment banks have already
recognised the importance of achieving a
single, consolidated view of collateral
across the full trade lifecycle and all asset
classes, and many have taken steps to
implement such a view. However,
Accenture’s belief is that this is only the
basic starting point on the journey towards
truly effective collateral optimisation. The
key challenge is how to maximise the
business benefit of effective collateral
deployment at all times: through accurately
and quickly measuring collateral
requirements on an intra-day basis and
rapidly redistributing collateral around the
business to where it is needed most.
Collateral management is already
centre stage
Recognition of the importance of collateral
has been driven by regulatory mandate and
market developments. A raft of provision
has been mandated – across cleared and
non-cleared markets –by regulations
including Dodd-Frank, EMIR, Basel III / CRD
IV and BSCO/IOSCO. Standardised
derivatives contracts must now be traded
on exchanges or electronic trading
platforms and cleared through Central
Counterparties (CCPs) while bilateral
contracts are now subject to higher capital
requirements and rules concerning the
daily exchange of different margin types.
2
61%
The share of cleared trades has risen
consistently over the last five years,
reaching 61% at the end of 2013
3
In addition, market developments and
competition have played their role. Banks
have tended to favour more collateralised
secured lending since the financial crisis,
reflective of a reduced risk appetite.
Market participants have also pushed to
move trades to CCPs and/or document
them with Collateral Agreements (CSAs) in
order to reduce capital requirements for
their lines of business.
The share of cleared trades has risen
consistently over the last five years,
reaching 61% at the end of 2013 (see
Fig.1) In addition, by the end of 2013, 91%
of OTC derivative trades used a CSA, up
from 73.7% in 2012 (see Fig.2).
Most collateral is still in the form of cash,
with an associated higher cost of funding.
However there is an increasing movement
towards the use of other forms of collateral,
predominantly government and high-grade
corporate securities, while equities are also
increasingly acceptable as collateral at CCPs.
Collateral as a business line
Against this backdrop, the role of the
collateral function within banks’ business
and operating models has fundamentally
changed: it is no longer a support function
at the end of the trade lifecycle, but now
sits at the core of the business.
This change must be reflected in a new
operating model. Collateral management
needs to be viewed not as a cost centre but
rather as a provider of an invaluable service
to the trading function and to clients alike.
Once this model matures, banks will start to
see the benefits of effective collateral
management not only in reducing funding
costs, but as a revenue-generating function.
Indeed, Accenture believes that a
movement from “Foundation” to
“Comprehensive” maturity level for
collateral management (see Fig.3) has the
potential to unlock collateral inefficiencies
Figure 1: OTC IR derivative trades cleared vs. non-cleared
2007 2008 2009 2010 2011 2012 2013
400
350
300
250
200
150
100
50
0
70%
60%
50%
40%
30%
20%
10%
0%
Source: ISDA, Accenture Research • Cleared (adj. for double-counting)
• Non-cleared
• Share of cleared (right scale)
Source: Collateral Management, Unlocking the Potential in
Collateral. Accenture Research and Clearstream
4
of at least 4 billion Euros across the
industry as a whole.
Reaching a mature state requires the
effective addressing of several key factors:
•	Liquidity and capital management:
Collateral burdens for OTC derivatives
are currently so significant that they
are impacting liquidity profiles and the
cost of funding across the whole bank,
and must be factored into capital and
liquidity planning
•	Efficient use of assets: It is absolutely
critical to improve the cost of funding
through ensuring that all available
inventory is used in the most effective
way possible
•	Risk management: Reducing
operational and settlement risk with
the improvement of robust collateral
management processes and systems
as part of a trustworthy network of
partners for settlement and custody
will be important
•	Client service offering: Where possible,
identifying and marketing new
services that can be offered to clients
directly or as part of existing services.
It is absolutely critical to improve the cost of funding
through ensuring that all available inventory is used in
the most effective way possible
Figure 3: Collateral Management Maturity Model
Source: Accenture Research
Real-time view of collateral movements, allocation
decisions and simulation / visualisation techniques
RelativeValue
Enterprise-wide inventory and
consideration of collateral in trade
pricing and funding decisions
Consolidation of certain processes across asset
classes and basic optimisation
Asset Inventory and
agreements across individual
asset classes only, no
consolidated enterprise
wide view.
Some consolidation of assets
and agreements across asset
classes, for example OTC and
Listed Derrivatives, SBL and
Repo desks.
Full visibility of common asset
inventory across across the
firm and optimum
representation  visibility of
agreements data in systems.
Enhanced view of collateral
movement and settlement to
provide up to date view of
positions across organisation
at any given time.
Lack of collateral
optimisation: assets and
obligations matched on a
first-come, first-served basis.
Basic optimisation in the
form of Cheapest-to-Deliver
collateral allocation.
Basic partner  network
management functions.
Full tracking of encumbered/
unencumbered collateral,
optimisation algorithms
based on cost models and
allocation methods.
Real time cost/benefit analysis
in response to market events,
with collaborative algorithms
to support continued
optimality of allocation.
Collateral management is
managed as an end-of-day
process within the back office
- little or no interaction with
Front Office.
Post factum communication
and reporting is available to
Front Office regarding the
financing activity.
Full appreciation and
consideration of collateral in
trade pricing and decision
making by Front Office
including OIS discounting.
Collateral is traded as any
other asset class, both serving
to optimise the required
collateral from other business
lines as well as a profit centre
in its own right.
Valuations performed
differently by individual
desks within the bank.
Valuation process is
standardised and best
practices are shared across
the different desks.
Accurate pricing of collateral
assets and legal agreements.
Optimum pricing models to
perform what-if analysis for
future requirements and
liquidity management.
Real time simulation and
visualisation techniques to
spot opportunities for
improved allocation. Different
allocation strategies deployed
valuing collateral accordingly.
Asset 
Agreement
Inventory
Collateral
Tracking 
Optimisation
Front Office
Collaboration
Robust
Valuation
Optimal “At all times”
Comprehensive
Managed
Foundation
Complexity
Foundation Managed Comprehensive Optimal
Collateral Management is basic, back-office processing task
handled separately by individual lines of business
Figure 2: Percentage of trades
subject to collateral agreements
end-
2011
end-
2012
end-
2013
71.4%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: ISDA margin surveys
91.0%
73.7%
5
Optimal collateral allocation at
all times
The need to centralise collateral
management and secured funding
activities in the group has been identified,
with many banks striving to implement a
consolidated view of collateral
requirements and resources across
business units, geographies and products.
We view this as a necessary, fundamental
starting point to leverage future benefits,
and advise banks not addressing this
challenge to aggressively pursue change.
The focus for industry-leading banks
should be to ensure that collateral
deployment dynamically identifies and
matches the needs of the business at all
times. There are two key factors that are
essential for this – mobility and velocity.
Moving to a mature state will require
enormous rework in the following areas:
Operating Strategy: Banks must assess if
they are capable of delivering an
integrated collateral management and
optimisation service in-house, or if they
are better served by outsourcing to a
provider or undertaking a joint venture
with a third party. Banks will also need to
group counterparties and define different
collateral strategies for each of those
groups (e.g. best collateral first for market
infrastructures, cheapest-to-deliver for
peer banks).
Functional Design: The scope and number
of functions performed by a collateral
function will be vastly expanded from its
current state. Banks need to ensure that
the requisite blend of skills, resources and
strategic positioning is available to
undertake this challenge.
Capabilities and Processes: The modern
collateral function will be required to
analyse and measure the collateral
demands of an entire organisation on an
intra-day basis. Current processes and
capabilities will need to be overhauled and
upgraded to meet the concurrent
challenges of ensuring sufficient collateral
is always available to support the business,
reducing cost of funding, optimising
collateral through allocating the
cheapest assets from the available
inventory, and pursuing
rehypothecation where possible.
Technology: Crucial to supporting the
collateral function in the future is the
targeted, effective use of technology.
Banks are already developing
algorithms to assess collateral needs
rapidly and accurately. These new
models must be seamlessly integrated
with existing capabilities that manage
inventory, collateral requirements and
margin calls, valuation of securities
and communication with counterparties.
Banks have made significant progress in
consolidating their collateral operations,
but significant additional work is
required to truly optimise the collateral
function and make it a core driver of
the future banking business model.
Mobility
• Collateral must have the ability to be
redistributed quickly across the business
where it is needed most.
• Internal capabilities (analytics, algorithms
etc.) dynamically align collateral allocation
with market conditions and business stategy
• Banks use all their available positions as
security, quickly analysing if they are
accessible
• Impediments, such as market settlement or
constraints minimised.
Velocity
•	Collateral requirements assessed in the
real-time using:
	 - precise and rapid measurement of
business need,
	 - valuation and suitability assessment of
existing stock
	 - an understanding of the cost of funding
	 - a particular focus on maximising
re-hypothecation opportunities.
• This must be conducted on an intra-day basis.
Optimal Collateral Allocation
Banks have made significant progress in consolidating
their collateral operations but significant additional
work is required to truly optimise the collateral function
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more
than 305,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses and
governments. The company generated
net revenues of US$30.0 billion for the
fiscal year ended Aug. 31, 2014. Its home
page is www.accenture.com.
Accenture Experts
To discuss any of the ideas presented in
this paper please contact:
José Villar
Managing Director, Capital Markets, Madrid
jose.m.villar@accenture.com
+34 91 546 9229
Bart Coppens
Capital Markets, Brussels
b.coppens@accenture.com
+32 22 267 325
James Hopkins
Capital Markets, London
james.c.hopkins@accenture.com
+44 20 3335 0936
Disclaimer
This report has been prepared by and is distributed by Accenture. This document is for
information purposes. No part of this document may be reproduced in any manner
without the written permission of Accenture. While we take precautions to ensure
that the source and the information we base our judgments on is reliable, we do not
represent that this information is accurate or complete and it should not be relied upon
as such. It is provided with the understanding that Accenture is not acting in a fiduciary
capacity. Opinions expressed herein are subject to change without notice.
Copyright © 2014 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.

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Top Ten Challenges for Investment Banks 2015: Regulation: Challenge 2

  • 1. Managing Collateral: Optimal allocation at the heart of the business Top Ten Challenges for Investment Banks 2015 02 ManagingCollateral: Optimalallocationatthe heartofthebusiness
  • 2. 02 Managing Collateral: Optimal allocation at the heart of the business Regulatory changes and market developments have focused banks’ attention on effective collateral management, both for their own businesses and as a service to their clients. As traditional operating models are challenged by low margins and significant regulatory change, the optimisation of collateral assets is part of a wider focus on resource allocation across the whole investment banking industry. Most investment banks have already recognised the importance of achieving a single, consolidated view of collateral across the full trade lifecycle and all asset classes, and many have taken steps to implement such a view. However, Accenture’s belief is that this is only the basic starting point on the journey towards truly effective collateral optimisation. The key challenge is how to maximise the business benefit of effective collateral deployment at all times: through accurately and quickly measuring collateral requirements on an intra-day basis and rapidly redistributing collateral around the business to where it is needed most. Collateral management is already centre stage Recognition of the importance of collateral has been driven by regulatory mandate and market developments. A raft of provision has been mandated – across cleared and non-cleared markets –by regulations including Dodd-Frank, EMIR, Basel III / CRD IV and BSCO/IOSCO. Standardised derivatives contracts must now be traded on exchanges or electronic trading platforms and cleared through Central Counterparties (CCPs) while bilateral contracts are now subject to higher capital requirements and rules concerning the daily exchange of different margin types. 2 61% The share of cleared trades has risen consistently over the last five years, reaching 61% at the end of 2013
  • 3. 3 In addition, market developments and competition have played their role. Banks have tended to favour more collateralised secured lending since the financial crisis, reflective of a reduced risk appetite. Market participants have also pushed to move trades to CCPs and/or document them with Collateral Agreements (CSAs) in order to reduce capital requirements for their lines of business. The share of cleared trades has risen consistently over the last five years, reaching 61% at the end of 2013 (see Fig.1) In addition, by the end of 2013, 91% of OTC derivative trades used a CSA, up from 73.7% in 2012 (see Fig.2). Most collateral is still in the form of cash, with an associated higher cost of funding. However there is an increasing movement towards the use of other forms of collateral, predominantly government and high-grade corporate securities, while equities are also increasingly acceptable as collateral at CCPs. Collateral as a business line Against this backdrop, the role of the collateral function within banks’ business and operating models has fundamentally changed: it is no longer a support function at the end of the trade lifecycle, but now sits at the core of the business. This change must be reflected in a new operating model. Collateral management needs to be viewed not as a cost centre but rather as a provider of an invaluable service to the trading function and to clients alike. Once this model matures, banks will start to see the benefits of effective collateral management not only in reducing funding costs, but as a revenue-generating function. Indeed, Accenture believes that a movement from “Foundation” to “Comprehensive” maturity level for collateral management (see Fig.3) has the potential to unlock collateral inefficiencies Figure 1: OTC IR derivative trades cleared vs. non-cleared 2007 2008 2009 2010 2011 2012 2013 400 350 300 250 200 150 100 50 0 70% 60% 50% 40% 30% 20% 10% 0% Source: ISDA, Accenture Research • Cleared (adj. for double-counting) • Non-cleared • Share of cleared (right scale) Source: Collateral Management, Unlocking the Potential in Collateral. Accenture Research and Clearstream
  • 4. 4 of at least 4 billion Euros across the industry as a whole. Reaching a mature state requires the effective addressing of several key factors: • Liquidity and capital management: Collateral burdens for OTC derivatives are currently so significant that they are impacting liquidity profiles and the cost of funding across the whole bank, and must be factored into capital and liquidity planning • Efficient use of assets: It is absolutely critical to improve the cost of funding through ensuring that all available inventory is used in the most effective way possible • Risk management: Reducing operational and settlement risk with the improvement of robust collateral management processes and systems as part of a trustworthy network of partners for settlement and custody will be important • Client service offering: Where possible, identifying and marketing new services that can be offered to clients directly or as part of existing services. It is absolutely critical to improve the cost of funding through ensuring that all available inventory is used in the most effective way possible Figure 3: Collateral Management Maturity Model Source: Accenture Research Real-time view of collateral movements, allocation decisions and simulation / visualisation techniques RelativeValue Enterprise-wide inventory and consideration of collateral in trade pricing and funding decisions Consolidation of certain processes across asset classes and basic optimisation Asset Inventory and agreements across individual asset classes only, no consolidated enterprise wide view. Some consolidation of assets and agreements across asset classes, for example OTC and Listed Derrivatives, SBL and Repo desks. Full visibility of common asset inventory across across the firm and optimum representation visibility of agreements data in systems. Enhanced view of collateral movement and settlement to provide up to date view of positions across organisation at any given time. Lack of collateral optimisation: assets and obligations matched on a first-come, first-served basis. Basic optimisation in the form of Cheapest-to-Deliver collateral allocation. Basic partner network management functions. Full tracking of encumbered/ unencumbered collateral, optimisation algorithms based on cost models and allocation methods. Real time cost/benefit analysis in response to market events, with collaborative algorithms to support continued optimality of allocation. Collateral management is managed as an end-of-day process within the back office - little or no interaction with Front Office. Post factum communication and reporting is available to Front Office regarding the financing activity. Full appreciation and consideration of collateral in trade pricing and decision making by Front Office including OIS discounting. Collateral is traded as any other asset class, both serving to optimise the required collateral from other business lines as well as a profit centre in its own right. Valuations performed differently by individual desks within the bank. Valuation process is standardised and best practices are shared across the different desks. Accurate pricing of collateral assets and legal agreements. Optimum pricing models to perform what-if analysis for future requirements and liquidity management. Real time simulation and visualisation techniques to spot opportunities for improved allocation. Different allocation strategies deployed valuing collateral accordingly. Asset Agreement Inventory Collateral Tracking Optimisation Front Office Collaboration Robust Valuation Optimal “At all times” Comprehensive Managed Foundation Complexity Foundation Managed Comprehensive Optimal Collateral Management is basic, back-office processing task handled separately by individual lines of business Figure 2: Percentage of trades subject to collateral agreements end- 2011 end- 2012 end- 2013 71.4% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: ISDA margin surveys 91.0% 73.7%
  • 5. 5 Optimal collateral allocation at all times The need to centralise collateral management and secured funding activities in the group has been identified, with many banks striving to implement a consolidated view of collateral requirements and resources across business units, geographies and products. We view this as a necessary, fundamental starting point to leverage future benefits, and advise banks not addressing this challenge to aggressively pursue change. The focus for industry-leading banks should be to ensure that collateral deployment dynamically identifies and matches the needs of the business at all times. There are two key factors that are essential for this – mobility and velocity. Moving to a mature state will require enormous rework in the following areas: Operating Strategy: Banks must assess if they are capable of delivering an integrated collateral management and optimisation service in-house, or if they are better served by outsourcing to a provider or undertaking a joint venture with a third party. Banks will also need to group counterparties and define different collateral strategies for each of those groups (e.g. best collateral first for market infrastructures, cheapest-to-deliver for peer banks). Functional Design: The scope and number of functions performed by a collateral function will be vastly expanded from its current state. Banks need to ensure that the requisite blend of skills, resources and strategic positioning is available to undertake this challenge. Capabilities and Processes: The modern collateral function will be required to analyse and measure the collateral demands of an entire organisation on an intra-day basis. Current processes and capabilities will need to be overhauled and upgraded to meet the concurrent challenges of ensuring sufficient collateral is always available to support the business, reducing cost of funding, optimising collateral through allocating the cheapest assets from the available inventory, and pursuing rehypothecation where possible. Technology: Crucial to supporting the collateral function in the future is the targeted, effective use of technology. Banks are already developing algorithms to assess collateral needs rapidly and accurately. These new models must be seamlessly integrated with existing capabilities that manage inventory, collateral requirements and margin calls, valuation of securities and communication with counterparties. Banks have made significant progress in consolidating their collateral operations, but significant additional work is required to truly optimise the collateral function and make it a core driver of the future banking business model. Mobility • Collateral must have the ability to be redistributed quickly across the business where it is needed most. • Internal capabilities (analytics, algorithms etc.) dynamically align collateral allocation with market conditions and business stategy • Banks use all their available positions as security, quickly analysing if they are accessible • Impediments, such as market settlement or constraints minimised. Velocity • Collateral requirements assessed in the real-time using: - precise and rapid measurement of business need, - valuation and suitability assessment of existing stock - an understanding of the cost of funding - a particular focus on maximising re-hypothecation opportunities. • This must be conducted on an intra-day basis. Optimal Collateral Allocation Banks have made significant progress in consolidating their collateral operations but significant additional work is required to truly optimise the collateral function
  • 6. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. Accenture Experts To discuss any of the ideas presented in this paper please contact: José Villar Managing Director, Capital Markets, Madrid jose.m.villar@accenture.com +34 91 546 9229 Bart Coppens Capital Markets, Brussels b.coppens@accenture.com +32 22 267 325 James Hopkins Capital Markets, London james.c.hopkins@accenture.com +44 20 3335 0936 Disclaimer This report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.