Business Culture: Collateral Management Services and Strategies

Collateral Management Services are used for credit risk reduction in unsecured financial transactions.  In world trading transactions, there is a long history of payments that have been secured by providing collateral as security against potential defaults and the importance of collateral management services has been increasing with time.  Currently, the global financial markets are being pressured by regulations and increased scrutiny.  This largely explains why collateral management has taken prime importance in the current market context, and this can be gauged by the fact that it is a topic of priority at the board level in financial institutions across the world.

According to Euroclear Group, strategies in collateral management are gaining importance as market liquidity has grown increasingly constrained.  Thus, the management of risk, liquidity, and balance sheet factors are now being considered as foremost strategic functions at the managerial levels.  The maintenance of competitive advantage is key to success in the volatile business world of today — and the management of cash, collateral, and margins lie at the center of the tactics businesses need to employ to sustain it.  Euroclear provides infrastructure for open architecture aimed at collateral management, which helps to optimize liquidity and connects its clients to funding pools and potential counterparts. This way, businesses can support the movement of assets across national borders without compromising on the security of these assets.

Another factor to consider is the over-the-counter (OTC) derivatives market, which is under stringent regulation and banks are having a hard time conforming to the new clearing rules, transparency initiatives, and margin standards.  With every new rule implemented, the importance of collateral management goes up a notch. The new margin standards are now enabling banks to focus on their collateral management function — and they are increasingly creating sophisticated collateral systems.  They are also designing operating models that are much more robust than those that have been seen previously. These are intended to meet the new regulations.  

Global Management Standards

The Basel Committee on Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO) in 2013 published the global minimum margin standards framework designed for uncleared OTC derivatives.  As per this framework, the systemic risk is by ensuring that a collateral is made available to the collecting party in case a default occurs.  These rules are now being applied all over the world, however, local regulation proceeds in steps.  In the United States, Canada, and Japan, the rules were enforced in 2016 for those dealers who were engaged in swapping volumes.

Collateral Management services are now in high demand as the banks are facing many challenges in implementing the first wave of changes.  Firms are required to update their collateral agreements in a very short period, and this gives rise to many amendments with each bank.  This causes severe stress on business signatories and legal teams, so the requirements for effective and efficient collateral management services is very important.  These services are now being offered globally by firms proficient in this field, and your business must take notice if it plans to remain competitive at the global level.

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