The Dodd-Frank Act is set to change the rules of collateral management for over-the-counter (OTC) derivative transactions in the financial services industry, especially in regards to new Independent Amount (IA) posting requirements. While the definition of the rules have not yet been finalized, adoption of the Dodd-Frank Act will lead to significant growth of the amount of collateral held against OTC trades and a sharp increase in the operational complexity of managing collateral.

The changes being introduced by the proposed regulations touch all key areas of a bank’s collateral management process, including:

  • Product and counterparty coverage
  • Documentation of independent amount (IA) terms in the agreements
  • Collateral eligibility and restrictions
  • IA posting timing
  • IA margin calculation methodology

Collateral management is becoming increasingly complex with the adoption of the new Dodd-Frank rules—banks’ operating models will have to change in order to adapt. Join me next week when I look at the four steps banks can take now to get ready for the new rules expected to take place by the end of this year.

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