Collateral Management
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The document discusses collateral management and its key functions. Collateral management focuses on credit risk mitigation and reducing loss given default through improved recovery rates. Efficient collateralization can lower expected losses and allow reductions in economic and regulatory capital. However, collateralization also introduces legal and operational risks. Traditionally located within operations or credit, collateral management interfaces with various functions like sales, risk, and treasury. The selection of collateral assets and accurate exposure measurement are critical factors for collateral management success.
Collateral Management
- 1. COLLATERAL MANAGEMENT Product Market Strategy Sales & Relationship Counterpart Rating Credit & Limit Management Treasury Pricing & Valuation Policy Default Management Optimum Collateralization Model Measurement Methods Legal Risk Operational Risk Regulatory Compliance Risk Monitoring & Control Capital Management Stress Testing (FCCM)
- 2. COLLATERAL MANAGEMENT Collateral Management Framework Sales Credit Treasury Product Market Risk Data Exposure Management Management Exposure Reporting Valuation Trade Matching Netting Market Capture Credit Risk Data Collateral Collateral Management Valuation Contract Collateral Legal Setup Risk Criteria Allocation Liquidity Regulatory Agreement Risk Reporting Cash Settlement Margin Call Management Process Client Operational Data Reconciliation Interest & Risk Inventory Process Charges Client Operations Reporting Position Legal Risk Processing Accounting Settlement
- 3. COLLATERAL MANAGEMENT Sales Legal Compliance Treasury Collateral Function Interaction Capital Risk Operations The relationship and interaction of the Collateral Management Function with associate and dependent functions defines its efficiency and success
- 4. COLLATERAL MANAGEMENT Key Factors impacting the collateral function Collateralization primarily focuses on credit risk mitigation and operates through improving the recovery rate in a post-default situation, and decreasing the loss given default. Efficient collateralization leads to lower expected losses in a collateralized portfolio, and allows both economic and regulatory capital provisions to be reduced. This element can significantly improve deal pricing, especially where firms explicitly or implicitly charge for credit risk. Collateralization introduces legal and operational risks in the process, often overlooked. Traditionally located within operations or credit and interfaces with sales, risk, treasury, etc. The selection of collateral assets is a critical factor in the overall success of a collateral agreement. Exposure measurement is key to its implementation - Current Credit Exposure / MTM, and Potential Future Credit Exposure. Integration drivers - improve cross-product risk management, and aggregate collateral assets to maximise funding capacity Collateral Clearing Bank – the future of collateralization, settlement and disputes.