For the longest time, collateral management has been viewed as a routine or perfunctory middle-office function whose primary purpose is to support front-office strategy. But change is afoot. A series of macro trends is forcing asset managers to examine how they manage collateral through a strategic lens. Today, I’ll look at three key factors that are driving this change and reveal three ways that firms could use to take collateral management to the next level.
Three reasons to rethink collateral management
- Regulatory requirements demand it. The European Market Infrastructure Regulation (EMIR) and Dodd-Frank are demanding more collateral, timely margin movements and mandatory variation margin for over-the-counter derivatives. And that’s just the beginning. Firms must be prepared to report timely metrics and exposure calculations across their organizations.
- Fund performance depends on it. Given the current low-return environment, tight expense ratios and growing interest in passive funds, firms need to take every opportunity to reduce costs and improve fund performance. Posting collateral makes it possible to trade in different asset types, but your choice of collateral could have significant implications that must be considered.
- Transaction complexity requires it. In the past, collateral was a relatively minor blip on the risk-profile radar. Today, collateral is posted for multiple asset types, markets, locations, legal entities and functions. Firms should be able to gauge their enterprise-wide exposure in near real time.
Three ways to take collateral management to the next level
- Change your operating model. By transitioning collateral management from a siloed process spread across business lines to a centralized function in the middle office, you could increase efficiency and improve visibility.
- Upgrade your technology. Whether you choose to build or buy, new technology done right could help standardize your collateral management processes, and facilitate regulatory reporting and risk management.
- Consider outsourcing. Partnering with a service provider may enable you to access expanded data and reporting capabilities without purchasing and supporting the technology in-house.
It’s no longer enough for your collateral management to simply support the front office—it needs to add value to your business. How you transform the process will ultimately depend on a wide range of factors, including your firm’s size and product types. What’s most important is that you start.
For a closer look at how collateral management is changing, read: InsideOps: Collateral Management Gains Prominence. Or, if you’re interested in re-examining how your firm manages collateral and you’d like a fresh perspective, contact me directly at firstname.lastname@example.org.