Collateral Management Optimization is a solution to help institutions efficiently allocate their assets to meet collateral requirements. It is closely related to Balance Sheet Optimization as it determines the true cost to hold assets in a given entity.
Typical users are the collateral teams at investment banks, retirement and pension plans, insurance companies, and exchanges.
Problem: New laws and risk management practices by counterparties are requiring more collateral to secure trades as described by this paper from the Bank for International Settlements. At the same time, increased capital ratios are shrinking the supply of assets available as collateral.
Solution: Collateral Management Optimization determines the most efficient way to allocate collateral to counterparties and swap collateral with existing counterparties. Typical best practices use a process called “cheapest to deliver”. Optimization can improve those results by another 5 basis points.
Resources on Collateral Management:
Optimized Collateral Allocation and Replacement
Tabb Group Report on the future of collateral
Cross Product Collateral Management
TABB Report Finds Buy Side Controls Capital in New World of Swaps as Improved Risk Analytics Come of Age
McKinsey report on best practices for broker-dealers
Collateral Thinking – Securities Lending Times (SLT) debate on Collateral Management
A panel discussion from SLT on Collateral Management
Industry survey: How are companies adopting to changing industry landscape?