Turning up the dial

Against the backdrop of the ever-increasing importance of collateral from a trading, risk and capital management perspective, holistic management of collateral is rapidly becoming a necessity.

Turning up the dial - Developing a holistic collateral model

The ISDA 2014 Margin Survey states that “optimisation refers to the ability to post and re-use collateral according to delivery preferences such as cost of funding and delivery, liquidity and market capitalization, embedded haircuts in the CSA, availability of assets to the delivery party, cost of reinvestment and yield, ability to re-use and risk.”

This speaks to the rate of return by eligible assets versus the internal cost of funds, and is key to economic optimisation. Determining how best to allocate those assets means considering eligibility against the range of unencumbered assets available in inventory and in the market as a whole to determine what is cheapest to deliver, and ensure best use is made of a firms’ own security positions.

As such, identifying and utilising eligible assets becomes the role of a secured financing desk. Collateral optimisation can be performed across any collateralised product, cleared or non-cleared. If we broaden the scope beyond OTC derivatives, we can apply the same fundamental principles to repo, stock loan and listed derivatives.

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Andrew Rossiter

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Andrew Rossiter

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