Collateral Management

Systems to manage and optimize collateral

Course objectives

  • Master the implications of today's collateralised world
  • Understand the financial and economic consequences
  • Learn about collateral management systems: the players, the processes, the inputs and outputs
  • Recognise and understand the key drivers in optimising collateral performance

Why collateral?

  • CCPs, bilateral portfolios, central banks; increasing requirements to collateralise: Dodd Frank and EMIR
  • Counterparty risk reduction, liquidity impact

Collateralisation process

  • The CSA (Credit Support Annex to ISDA master agreement)
  • Valuing the portfolio to be collateralised
  • Definition with each CP of the schedule of acceptable collateral
    • Cash and near-cash: currencies
    • Bonds: issued by governments, government agencies, supra-nationals, corporates
    • Other debt claims, precious metals, securitised obligations
    • Repos and securities lending
    • Baskets of deliverable securities; GC and specials
    • Correlation concepts
  • Where to find collateral; who holds it, who needs it?
  • Haircuts: how is the level set? Interest rate instruments, currencies
  • Valuing collateral
  • Margin call thresholds
  • Mark-to-market frequency

Case study:

* Prepare a collateral account system for bilateral OTC derivatives portfolio

* OTC derivatives cleared at a CCP: as member; as customer of member

Collateral management systems

  • Securities depositaries: EuroClear, Cedel, CACEIS, US custodian banks
  • Tri-party collateral management; principles and drivers
  • Collateral management system (CMS)
    • ESES in France, Belgium, Netherlands with their respective central banks
    • LCH.Clearnet
    • Collateral Basket With Pledge (CBWP)
  • Delivery against Payment mechanism
  • The role of the bank acting as Clearing Broker in collateral transformation

Case study:

* Constitution of a collateral account (following the previous case study) management of collateral positions throughout the life of the exposure

* Analysis: the risks to monitor in bilateral exposures:

* Last days at Lehman; dirty tricks

Optimising collateral

  • Collateral management function: how and why
  • Collateral quality control
  • Minimisation of repo fails
  • Risk measurement
  • Collateral substitution; collateral swaps
  • Re-hypothecation of securities accepted as collateral: principle and limitations
  • Systemic risk of a collateral crunch?

Case study: Macro number changes wrought by regulation ; how they are affecting the banks and other players in the credit and interest rate markets



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