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

David Gardiner

David Gardiner

After 30 years of both operational and management experience within various brokers (Fulton Eurolink, Prebon Yamane, Euro Brokers) in different countries, David was Head of sales at SwapClear in LCH Clearnet for more than 10 years. This experience makes him one of the best experts in the clearing of OTC derivatives.

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