Evolution of Collateral : How do we see collateral management evolving in 5 years time?

Collateral Management

The Global Financial Crisis (GFC) of 2008 led to a waft of sweeping regulations across the financial markets including the requirement of derivative transactions to be collateralized to reduce counterparty credit risk. Starting with posting collateral for variation margin (VM), the regulation has now also heavily extended to posting initial margin (IM). The advent of the Uncleared Margin Rules (UMR) has made the requirement even more stringent by making it mandatory.

With BCBS and IOSCO’s recommendation, on April 3 2020, to delay by one year the implementation of phases 5 and 6 of UMR – the final implementation phase will now take place on 1 September 2022 – it is clear to see that regulation will continue to alter the collateral management landscape for the foreseeable future. (You can read Cassini’s UMR commentary on the delay here). 

The current unprecedented volatility has also altered collateral management, with significant swings in Mark-To-Markets (MTM) and increased margin calls.

But what does this mean for those firms’ whose collateral operations have changed dramatically, not only in the last few years, but the last few months?  How do we see collateral management evolving in the next five years?

This week, Mohit Gupta, Senior Product Specialist at Cassini Systems, rounds up this collateral optimization video series by delving into where he sees collateral management in five years time*. 

*Since the filming of this video, the Uncleared Margin Rules (UMR) have been delayed a further year to 2022.

Key takeaways

– Empower your your organization –

Specifically given current volatility

Ø Regulation is going to be at the forefront of dictating collateral management, and the systems firms use.

Ø Firms will start looking at tools that not only enable them to become regulatory compliant but also reduce costs, improve the liquidity of collateral and efficiently perform operations.

Ø Collateral optimization will start to be used as a front office tool so that firms can understand the costs of a trade (including the required amount of collateral to be posted), before they trade.

Last month, Mohit Gupta, explained why your front office needs access to collateral and cost optimization tools providing margin transparency, collateral sufficiency, and the ability to understand margin drivers – enabling you to reduce your margin costs.

In the second video of this series, Mohit also explained how margin and collateral optimization tools can benefit an entire organization, from the front office to the back office. 

Resources for you:

Ø Booklet download – Evolution of Collateral: Moving Collateral Optimization into the front office 

Ø How Pre-Trade IM Calculation can optimize and reduce collateral drag 

Ø Take control of IM with forecasting and optimization