The Road to an Effective Collateral Management Program

The Road to an Effective Collateral Management Program 7 Analytics can provide insight throughout the trade life cycle. Rule-based pre-trade analytics can identify in-scope trades for IM posting by asset class or jurisdiction and also detect the optimal collateral to use based on funding costs, macro and interest rate environment, and credit spreads. In post-trade, analytics can facilitate firm-wide understanding of the margin impact of posting collateral as well as linking return on assets with their cost of funding by matching sources and uses of liquidity. Firms who are positioned to couple internal data sets with market data and machine learning can realize the benefits of predictive analytics. These advanced models are able to forecast collateral or borrowing requirements and risk levels by analyzing trends in historic behavior. Algorithms drive predictive analytics to find optimal collateral, forecast collateral or borrowing requirements and risk levels based on performance of previous postings that account for funding, settlement, and operational costs. This can assist firms in proactively managing their collateral requirements. Today’s treasury management and collateral solution tools have capabilities to quickly identify over-collateralized positions so that firms may recall and redeploy collateral, as well as functions that validate and calculate margin requirements to facilitate responses or disputes.  6 Monitor: Oversee the Collateral Life Cycle Monitoring the collateral throughout its life cycle supports ongoing analysis and allows the firm to determine its optimal use. These efforts include collateral matching and settlement, the ongoing calculation of margin exposures, as well as identifying discrepancies in positions. Monitoring can also encompass tracking collateral movements across the firm’s accounts in multiple jurisdictions and legal entities and reporting consolidated positions to view the firm’s entire collateral repository. Oversight of the firm’s collateral can be improved through robust technology and infrastructure. Internal and external systems need to seamlessly connect with each other to manage, monitor, and report collateral at a security level in a near-real-time basis. The optimal infrastructure to build connections with service providers and market utilities would provide a common interface to deploy and reconcile collateral. Compatible systems also enhance the onboarding process by removing unnecessary bottlenecks from the Know Your Customer, Anti-Money Laundering, and due diligence processes. The technology supporting collateral management should be robust, but flexible. As regulation evolves, systems will require enhanced ability to process different types of collateral and manage an increased volume of activity. Around the Bend Over the next several years, changing market conditions could impact collateral costs. Moderate global growth has suppressed demand for some forms of collateral while a relatively abundant supply of high-quality bonds and cash have been available. A rising rate environment, however, could negatively impact collateral costs. Over time, higher collateral expenses could create new supply pressures, particularly on high-quality liquid assets. General collateral shortfalls, however, may be unlikely in part because remaining market participants coming in scope are smaller firms whose positions will not have outsize market impact. Collateral management innovation will proliferate as defined protocols to connect with vendors advance and standard calculation models and reporting templates come into play, rising to meet the demand of market participants’ shared needs. Firms cannot take the scenic route — collateral management complexity and opportunity will only grow over the next several years. Consistently revisiting landmarks including refining analytical capabilities as real-time data modelling advances and ensuring that monitoring adapts to regulatory change will be an ongoing effort. Firms will want to routinely evaluate their risk appetite and overall portfolio to navigate new solutions.