Optimising your collateral management

Collateral management is now under unprecedented levels of close scrutiny. Historically a support function, it has now moved centre stage, partly due to high-profile examples of what can happen if you lose control.

New regulations require banks to prove that they are in control of their own and their clients’ assets. They also now have to strengthen their balance sheets by maintaining higher levels of capital adequacy. However, most banks don’t have sophisticated collateral management systems and these are very unlikely to be integrated across the enterprise. Existing collateral management is often manually intensive, time-consuming, error-prone and not scalable.

Many banks manage collateral in business silos - with prime services, equity finance, repo and treasury. Recent events have forced banks to introduce new processes and procedures, many of which are highly manual due to the lack of technology. As a result, collateral management departments are overstretched, even with current volumes. It is therefore difficult to imagine how they will cope as volatility and volumes increase, and few banks have a clear vision of this. One recent report estimated that $2000 billion of extra collateral will be needed to meet margin demands for Central Counterparty (CCP) clearing. A ‘squeeze’ of this nature will probably means that all banks will have to make further optimisations in their use of assets - even if they believe they do so already.

To discuss this topic further, please get in touch with our specialist