This 13-Part Collateral Management Guide is written as a source of useful free information on all aspects of

collateral management. Each Part can be accessed by clicking the link at the bottom of the page.
What is Collateral Management?
At a high level, collateral management is the function responsible for reducing credit risk in unsecured financial
transactions. Collateral has been used for hundreds of years to provide security against the possibility of
payment default by the opposing party (or parties) in a trade. In our modern banking industry collateral is used
most prevalently as bilateral insurance in over the counter (OTC) financial transactions. However, collateral
management has evolved rapidly in the last 15-20 years with increasing use of new technologies, competitive
pressures in the institutional finance industry, and heightened counterparty risk from the wide use of derivatives,
securitization of asset pools, and leverage. As a result, collateral management now encompasses multiple
complex and interrelated functions, including repos, tri-party / multilateral collateral, collateral
outsourcing, collateral arbitrage, collateral tax treatment, cross-border collateralization, credit
risk, counterparty credit limits, and enhanced legal protections using ISDA collateral agreements.
Credit risk exists in any transaction which is not executed on a strictly cash basis. An example of credit-risk free
transaction would be the outright purchase of a stock or bond on an exchange with a clearing house. Examples
of transactions involving credit risk include over the counter (OTC) derivative deals (swaps, swaptions, credit
default swaps, CDOs) and business-to-business loans (repos, total return swaps, money market transactions,
term loans, notes, etc.). Collateral of some sort is usually required by the counterparties in these transactions
because it mitigates the risk of payment default. Collateral can be in the form of cash, securities (typically high
grade government bonds or notes, stocks, and increasingly other forms such as MBS or ABS pools, leases, real
estate, art, etc.)
Collateral is typically required to wholly or partially secure derivative transactions between institutional
counterparties such as banks, broker-dealers, hedge funds, and lenders. Although collateral is also used in
consumer and small business lending (for example home loans, car loans, etc.), the focus of this article is on
collaterization of OTC derivative transactions.
Collaterization is the act of securing a transaction with collateral. It has multiple uses which fall under the
umbrella of collateral management:
- A credit enhancement technique allowing a net borrower to receive better borrowing rates or haircuts.
- A credit risk mitigation tool for private/OTC transactions -- offsets risk that counterparty will default on deal
obligations (in whole or part).
- Applied to secure individual deals or entire portfolios on a net basis.
- A trade facilitation tool which enable parties to trade with one another when they would otherwise be
prohibited from doing so due to credit risk limits or regulations (for example European pension fund regulations or
Islamic banking law).
- A component of firm wide portfolio risk and risk management including market risk (VaR, stress testing),
capital adequacy, regulatory compliance and operational risk (Basel II, MiFid, Solvency II, FAS 133, FAS 157, IAS
39, etc.), and asset-liability management (ALM).
- A money market investment (lending for short periods to earn interest on available cash or securities).
- A balance sheet management technique used to optimize bank capital, meet asset-liability coverage rules, or
earn extra income from lending excess assets to other institutions in need of additional assets.
- An arbitrage opportunity through the use of tri-party collateral transactions.
- An outsourced tri-party collateral / tri-party repo service for major broker-dealers to offer to their clients.

Collateral Management Glossary of Key Terms

The following key terms will be useful as you read through this Guide.
- Add-On: An additional currency amount added on to the mark to market value of an underlying trade or
security to offset the risk of non-payment. This represents the credit spread above the default-free rate which
one counterparty charges the other based on its internal calculations (often negotiated beforehand and
memorialized in a CSA).
- Call amount: the currency amount of collateral being requested by the Taker.
- Credit Support Annex (CSA): a legal agreement which sets forth the terms and conditions of the credit
arrangements between the counterparties. The trades are normally executed under an ISDA Master Agreement
then the credit terms are formalized separately in a CSA (SEE ALSO Collateral Support Document).
- Collateral Support Document (CSD): a legal agreement which sets forth the terms and conditions that
collaterization will occur under in a bi-lateral or tri-lateral / multilateral relationship.
- Give: to transfer collateral to a counterparty to meet a collateral or margin demand. The counterparty with
negative mark-to-market (a loss) is usually the collateral Giver. (SEE ALSO Pledge).
- Haircut (SEE Valuation Percentage).
- Independent Amount: An additional amount which is paid above the mark-to-market value of the trade or
portfolio. The Independent Amount is required to offset the potential future exposure or credit risk between
margin call calculation periods. If daily calculations are used, the Independent Amount offsets the overnight
credit risk. If weekly calculations are done, the Independent Amount will usually be higher to offset a large
amount of potential mark-to-market movement that can occur in a week versus a day. Many counterparties set
the Independent Amount at zero then substitute the Minimum Transfer Amount (MTA) as the Independent
Amount on a counterparty-by-counterparty basis.
- Margin: Initial margin is the amount of collateral (in currency value) that must be posted up front to enter into a
deal on day 1. Variation margin (a.k.a. maintenance margin) is the amount of collateral that must be posted by
either party to offset changes in the value of the underlying deal. Initial margin is generally, but not always,
higher than variation margin.
- Margin Call: A request typically made by the party with a net positive gain to the party with a net negative gain
to post additional collateral to offset credit risk due to changes in deal value.
- Mark to Market (MTM): Currency valuation of a trade, security, or portfolio based on available comparative
trade prices in the open market within a stated time frame. MTM does not take into account any price slippage or
liquidity effect that might occur from exiting the deal in the open market, but uses the same or similar transaction
prices as indicators of value.
- Mark to Model: Currency valuation of a trade or security based on the output of a theoretical pricing model
(e.g. Black Scholes).
- Minimum Transfer Amount (MTA): The smallest amount of currency value that is allowable for transfer as
collateral. This is a lower threshold beneath which the transfer is more costly
than the benefits provided by collaterization. For large banks, the MTA is usually in the USD 100,000 range, but
can be lower.
- Netting: the process of aggregating all open trades with a counterparty together to reach a net mark-to-market
portfolio value and exposure estimate. Netting facilitates operational efficiency and
reduced capital requirements by taking advantage of reduced risk exposures due to correlation effects of portfolio
diversification versus valuing all trades independently. However, netting relies upon efficient and accurate pricing
at a portfolio level to be effective.
- Pledge: to give collateral to your counterparty. (SEE ALSO Give).
- Potential Future Exposure (PFE): The estimated likelihood of loss due to nonpayment or other risk, in this
case the likelihood of default on a counterparty's obligations.

- Rehypothecation: the secondary trading of collateral. Rehypothecation is the cornerstone of tri-party collateral
management.
- Substitution: replacing one form of collateral (e.g. corporate bond) with another form of collateral (e.g.
Treasury bond) during the life of a particular deal or trading relationship.
- Take: to receive collateral from a counterparty to meet a collateral or margin demand. The counterparty with
positive mark-to-market (a gain) is usually the collateral Taker.
- Threshold Amount: the amount of unsecured credit risk that two counterparties are willing to accept before a
collateral demand will be made. The counterparties typically agree to a Threshold Amount prior to dealing, but
this is a source of ongoing friction between OTC counterparties and their brokers.
- Top-up: To give additional collateral to your counterparty to meet a margin call.
- Valuation Percentage: a percentage applied to the mark-to-market value of collateral which reduces its value
for collaterization purposes. Also known as a "haircut", the Valuation Percentage protects the collateral Taker
from drops in the collateral's MTM value between margin call periods. For example, if the MTM value of the
collateral is $100 and the Valuation Percentage = 98.5% then 1.5% is being charged to offset period-to-period
valuation risk and
the collateral amount counted is only $98.50. The Valuation Percentage offered by different counterparties and
brokers may vary in the market, so buy side participants often "haircut shop" for the best rate.

How Collateral Transfers Risk

In OTC trading, counterparties are exposed to the risk that the other counterparty will not make required
payments when
they are due. The risk of non-payment is called credit risk. These types of payments include derivative deal
payments (e.g. interest rate swap payments, CDS premiums or default payments), dividend payments for stocks,
coupon payments for bonds, etc. The amount of credit risk varies in real time and must be managed on a trade,
counterparty, and net portfolio basis.
The primary purpose for collateralization is to transfer risk from the party in the net positive (gain) position to
the party in the net negative (loss) position during the life of a deal. This is done by requiring the losing party
to post or transfer an asset (cash, marketable securities) to the winning party as a form of ongoing security. In
the event of a default, the creditor party then has the right to keep the asset to reduce his loss. The currency
value of the collateral represents the estimated probability of payment default, mulitplied by the notional value of
the expected payment(s). This is known as Potential Future Exposure or PFE.
Two simple examples demonstrate this dynamic:
Securities Collateral Example:
1) Net Exposure (single or multiple deals) = $100
2) Collateral posted previously = ($80)
3) Net collateral delivery requirement = $20 = CREDIT RISK
4) Collateral given = $20
5) Net exposure = $0 = NO CREDIT RISK REMAINS
Cash Collateral Example:
1) Net Exposure (single or multiple deals) = $100
2) Cash Collateral Posted = ($80)
3) Overnight interest earned on Cash ($0.10)
4) Net Collateral delivery requirement = $19.90 = CREDIT RISK
5) Collateral given = $15
6) Net exposure = $4.90 = REMAINING CREDIT RISK
There is an important difference between over the counter (OTC) deals and exchange-traded deals. OTC
transactions do not normally have a clearing houseacting in a credit risk mitigation role between the
counterparties which guarantees and processes deal payments. An exchange clearing house insures that
buyers and sellers on the exchange will make and receive their payments by requiring traders to post daily
margin in the form of cash or marketable securities. Since this form of insurance is not available to OTC
counterparties, they need another form of insurance. Collateral acts as partial insurance to offset changes in
market value.
Credit risk can shift back and forth from one counterparty to the other on a constant basis. Mark-to-market
values on open positions change daily, weekly and monthly. The counterparty with a net positive gain is exposed
to unsecured credit risk in the amount of open uncollaterized gain. This credit risk can continue to increase until
the party has a large unsecured gain. By demanding additional collateral, this profit is "locked in" or insured up to
the market value of the collateral posted, less the transaction costs associated with liquidating the collateral. In
the event of a missed or delayed payment the Taker of collateral can keep the collateral posted and sell it in the
open market to offset the lost income.
Margin agreements typically provide a grace period for the counterparties to negotiate differences in valuation,
adjust collateral amounts, substitute one collateral form for another, etc. This provides some flexibility in the
relationship and keeps things running smoothly in the event that a particular type of collateral (e.g. U.S. Treasury
Bonds) are not easily available at a reasonable price at the time of the margin call, or there is a disagreement on
what the underlying deal value might be (this is common on illiquid OTC structured deals).
Credit Risk vs. Collateral Requirements
Credit departments of banks, broker-dealers, lenders, and buy side institutions rely on a variety of techniques
to assess credit risk of their counterparties. These include:

- External credit ratings

- Internal credit ratings
- Payment histories
- Statistical default probabilities per counterparty, industry, or market
- CDS spreads (if the counterparty is an issuer with CDS written on its bonds)
- Equity prices (the counterparty's equity price is considered an accurate forward-looking gauge of financial
health)
Collateral requirements can increase or decrease depending on the factors above. In addition, two additional
factors can influence the amount of collateral required:
- Length of the deal: overnight repos have lower collateral requirements than 30 year swaps as there is far less
time in which to default.
- Quality of collateral: more collateral is required if the securities posted are rated less than AAA, or have volatile
prices (e.g. credit default swaps)
Deal Risk Still Remains
Even if a deal is properly collaterized, there still remain legal, operational, and other risks. In
particular, bankruptcy of a counterparty can pose extreme challenges in liquidating and collecting the cash
value of the collateral posted. In bankruptcy, it is possible that the collateral can be "clawed back" by the
bankruptcy court if it is found that another counterparty had a prior claim to the collateral posted by the defaulting
party. This situation can be complicated further in cross-border deals (domestic or international) by differences in
jurisdiction and legal systems.
It is critical that the Collateral Support Document between the counterparties address these issues and provide
for adequate assurance that the collateral posted will be capable of transfer and liquidation on failure to pay, and
will not be encumbered by prior pledges or debts. It is also critical that the jurisdiction in which the transaction
was completed fully enforces the collateral agreements and does not invalidate them.

Managing financial collateral is a complex process involving multiple parties.

Parties involved
- Collateral Management Team: Does collateral calculations on spreadsheets and dedicated software, delivers
and receives collateral, runs the collateral operations, maintains customer and securities data, issues and
receives margin calls, and liaises with customers, service providers, Legal, Middle Office, and other parties in the
collateral chain.
- Credit Analysis / Approval Team: Researches, analyzes and sets collateral requirements for new and
existing counterparties. Typically this entails a preliminary review as well as ongoing periodic reviews of the
credit risk of each counterparty.
- Front Office Sales and Traders: Sales people develop new eligible trading relationships and manage the
onboarding process for new accounts, including signing of legal collateral documents, account formation, and
ongoing sales transactions. Traders may execute trades only with approved counterparties.
- Middle Office: Typically responsible for risk and valuation measures, the Middle Office interacts with the
Collateral Management team on a daily basis.
- Legal Department: Conducts negotiations, drafting and review of agreements. Enforces collateral and
margin agreements, including initiation of collections and lawsuits where appropriate. Legal is required to sign off
on all written agreements.
- Valuation Team: This group focuses on valuing illiquid or exotic collateral and underlying trade position that
must be collaterized. Typically, these types of collateral and deals are thinly traded rather than liquid exchangetraded instruments.
- Accounting & Finance Team: Works with the Middle Office to calculate and account for P&L on collateral
posted and received. Also works with Tax and Auditors.
- Third Party Service Providers: Software providers, Consultants, Auditors, Tax Specialists, Tri-Party Collateral
Managers.
Creating a new collateral relationship
For OTC transactions, collateral is the norm rather than the exception. Prior to the widespread use of
derivatives, collateral was required by large banks only for smaller or riskier customers (such as hedge funds or
niche brokers), under the assumption that other large banks would rarely default on their obligations. With the
dramatically increased leverage built into the financial system through derivatives and securitized pools,
collaterization is now mandatory between almost all counterparties.
Once a new customer is identified by Sales, the first step is to conduct a basic credit analysis of that
customer. This is done by the Credit Analysis team. Only credit-worthy customers will be allowed to trade on a
non-collaterized basis.
The next step is to negotiate and enter into the appropriate legal agreements. In the world's major trading
centers, counterparties predominantly use ISDA Credit Support Annex (CSA) standards to ensure clear and
effective contracts exist before transactions begin. These agreements cover 90% plus of the information on
eligible collateral, margin requirements, independent amounts (haircuts) calculation and payment methods, etc.
Negotiation and finalizing these agreements can take up the bulk of the time in developing a new relationship,
often extending weeks or months.
Then the collateral teams at each counterparty implement and automate the collateral relationship. Bank
codes, SWIFT codes, custodian and transfer relationships, key contacts and phone numbers, report formats,
margin call processes, etc. are all communicated and entered into the collateral systems of both counterparties.
This process may be done in a matter of days or take up to several weeks.
If the two parties want to trade right away, they will typically post some initial reciprocal collateral with the
other party (either cash or default-free Treasury bonds) to "open the account." This lays the groundwork for new
trades, which will only require "topping up" the collateral to meet initial margin requirements.

Once these items are in place, the Front Office Sales and Traders can begin negotiating trades. Once a
trade is agreed upon, the Collateral Team is notified of the deal, and the required Initial Margin is posted to
enable the trade to occur.
Daily Collateral Operations Process
The Collateral Management team's job is to continually track, value, and give or receive collateral during the life
of every OTC trade in the institution's portfolio. This is a large and complex task requiring sophisticated systems
and dedicated personnel. The general tasks on a day-to-day basis include:
- Managing Collateral Movements: tracking the net MTM valuation, making and fielding margin calls, and
giving / taking collateral to offset credit risk on a deal and net portfolio basis.
- Custody, Clearing and Settlement: Depending on how the legal relationship is structured, one or the other
counterparty may act as a custodian for cash and securities, or a third party custodian may be hired. This
requires segregated accounts strictly for collateral by customer (and often sub-account level). The
custodian manages collateral inflows and outflows, counterparty payments (top-ups, etc.), interest calculations,
haircuts, dividends, coupon payments, etc. as well as accounting for and reporting all transactions accurately and
timely. The custodian role is often outsourced, especially by hedge funds who typically outsource this function
to a custodian subsidiary of their prime broker.
- Valuations: The Valuation team (often part of the Collateral or Middle Office team) is responsible for valuing
all securities and cash positions held or posted as collateral. This duty is affected by the valuation roles defined
in the CSA -- for example, many smaller hedge funds delegate valuation to their prime brokers who may have
greater access to comparative valuation data, valuation models, and large teams of qualified staff. Traditionally,
valuation has been done on an end of day (EOD) basis, but is now moving toward intraday and real time
valuation where possible.
- Margin Calls: When the Collateral Team determines that the mark-to-market change of a particular deal or net
portfolio position has moved against the counterparty by at least the Minimum Amount, a margin call is issued.
Margin calls are made via telephone, fax, email, or SWIFT message, stating the amount of collateral demand and
often the type of collateral required, if defined in the relevant CSA. The counterparty is then required to topup its collateral account by delivering cash or securities, typically by overnight wire transfer. If the
counterparty does not meet its margin call, and the amount is large enough, the Collateral team may issue a
notice indicating the trading relationship is temporarily or permanently halted until the account is brought to net
zero exposure. If the counterparty does not respond the custodian is notified, and the existing collateral may be
seized, and the account turned over to the Legal department for enforcement of any outstanding obligations.
Typically, the Front Office will offer the counterparty the opportunity to "break" the deal and pay a penalty
before full legal action is taken. The above dynamics are reversed if the first party is the net debtor (i.e. receives
one or more margin calls).
- Substitutions: Often one party would like to substitute one form of collateral for another. For example, cash
rather than Treasury Bonds, or Corporate Bonds rather than Treasuries. The Collateral Team will then look to the
CSA for guidance on acceptable substitute collateral (if covered) or make a decision based on the perceived
value of the substitute collateral. Collateral substitution allows for flexibility in the relationship, and the ability to
deliver good collateral at a lower net price. Once a substitution is accepted, this must be properly tracked in the
Collateral Management system as well as communicated to all relevant parties (custodians, valuation team, etc.),
and followed up to ensure the substitution actually occurs.
- Processing: Payment and event processing is often outsourced to a dedicated third party. This function
includes:
- Coupon payments
- Dividend payments
- Corporate actions (splits, reverse splits, share buybacks, etc.)
- Payment delays (accruing, accounting and charging interest or lost capital gains/losses)
- Redemptions
- Taxes (accounting for and issuing the necessary tax documents for each tax jurisdiction so customers can
properly account for and pay their taxes)

Collateral eligibility is one of the key steps in a stable trading relationship. Since the purpose of collaterization
is to secure or insure all or a portion of the counterparty credit risk in a trading relationship, eligible collateral must
be easily converted into economic value when needed (i.e. when a counterparty defaults).
Basic Requirements for Collateral Eligibility
- Liquid: Securities used as collateral must be highly liquid (marketable) so they can be sold for cash in the
open market on short notice. This may also apply to certain currencies as well -- USD and EUR are liquid, but
Turkish Lira may not be.
- Easy to settle: Treasury bonds, AAA Corporate bonds, large-cap equities, and many mortgage-backed bonds
are easy to settle, typically taking no more than one day.
- High quality (default free): Collateral itself should not have significant embedded credit risk itself. Major
industrialized country government bonds are unlikely to default, whereas junk bonds and emerging market
bonds have significant and widely varying credit risk and are unlikely to be accepted as collateral.
- Approved by the Credit Department: The Credit Team must approve all securities offered as collateral prior
to acceptance. Guidance is taken from the Credit Support Annex (CSA), but the Credit Team should have final
say since their credit analysis is often more up to date than the legal documents.
Types of Collateral
According to ISDA, the following types of collateral are most predominant:
- Cash (73% of USD and EUR trades according to ISDA 2005). Cash is easy to hold, easy to transfer, requires
little or no valuation.
- Fixed Income Securities: Predominantly Government Securities (Treasury Bonds, Agency Bonds, etc.), but
also includes other types such as MBS, ABS, corporate bonds, sovereign bonds, etc.
- Bank Guarantees
- Equities (stocks): Usually large-cap and highly liquid shares listed on major exchanges.
- Real Estate: Commercial buildings, land, etc. if deemed sufficiently liquid. This collateral is more relevant to
structured project financing transactions.
- Convertible Bonds: These must be issued by a credible company with low default risk, and must convert into
marketable common stock or premium stock at a significant discount.
- Exchange Traded Funds (ETFs)
- Mutual Fund Shares: This can be very complicated due to interactions between custody, taxes, trading
limitations, ownership concentrations, and redemption rights.
Considerations in Valuing Eligible Collateral
The ability to quickly and accurately value collateral is a critical element of its eligibility, without which the
collateral has little use. Collateral provides no security if it cannot be valued or traded for a known value. When
deciding whether collateral is eligible, the following factors are important:
- Who values the collateral? This is usually governed by either the CSA or trade documents (deal term sheet).
The choices are: 1) you, 2) me, 3) both, or 4) third party. Two banks will typically push for either 2) me or 3)
both, so that each has a hand in the final determination and can bring their valuation expertise to bear. Smaller
hedge funds without dedicated valuation teams usually choose 1) you or 4) third party. This gives valuation
control to the prime broker which typically has dedicated valuation personnel and a wider view of market prices.
- How is it valued? Depending on the type of trade, the valuation may be done on a mark to market
(MTM) or mark to model (theoretical valuation) basis. Where the trade is fairly vanilla and there are plenty of
comparative market prices, mark to market is selected. For more exotic or complex transactions, mark to model
may be necessary, and the determination of a) the model used, and b) who does the valuation, becomes

extremely important. These factors should be decided up front before doing a deal, or at least subject to
approval by the Collateral or Valuation teams before a deal is completed.
- How often is it valued? Traditional valuation is done on an end of day basis (EOD) after the market closes.
However, with the advancement of collateral systems, electronic order networks, and other technology, there is a
movement toward periodic intraday (i.e. 30 or 60 minute intervals) or real time valuation. Illiquid trades are
still valued on a daily basis and sometimes weekly or monthly for highly structured deals.
- Independent valuation required? In some instances a deal is so unique or illiquid that a third party valuator
or appraiser is required to theoretically price a deal for collateral and PnL purposes. Where this is necessary,
the issue becomes cost, the number of independent valuators used, and how to decide on a final value from
multiple different estimates without proceeding to litigation.

The Margin Call is the primary mechanism which ensures adequate collateral is posted during the life of a deal.
Occasionally counterparties may disagree on whether a margin call is appropriate, or the amount of collateral
requested.
Margin Call mechanics
1) All trades are marked to market (daily, weekly, monthly).
2) All collateral is marked to market.
3) Net collateral requirement is calculated internally by each party
4) Credit risk exposure is compared to a pre-defined acceptable exposure level.
5) A margin call is made to counterparty if exposure limit exceeded.
6) Counterparties net their collateral calculations (if both have posted / received collateral from the other).
Otherwise, the
party receiving a margin call either accepts the call on its face or analyzes it and determines how much needs to
be posted by looking at market prices, collateral agreements, etc.
7) The counterparties come to an agreement on how much needs to be posted.
8) The undisputed portion of collateral required (imbalance) is posted by the losing counterparty to the winning
counterparty. The disputed portion (if any) may be negotiated.
9) Collateral posting settles T+1 (next normal business day). This may take longer for non-standard collateral or
international transactions.
Collateral Disputes
There are several types of collateral disputes which occur most frequently. These include:
- Ineligible collateral / collateral recharacterization: The losing counterparty attempts to post securities
having less quality than required, or the quality of the collateral has dropped below the required threshold (e.g. an
investment grade bond has dropped to B-rated and is no longer eligible).
- Payment delays
- Valuation disagreements: Curves or prices may be captured at different times, from different data sources,
using different price samples, or the theoretical valuation done using different valuation models or settings.
- Portfolio mismatches: Missing trades are not included in the portfolio which creates net exposure calculation
differences. This is quite common, especially where the Front Office has failed to properly enter trades at one of
the counterparties.
Dispute Procedure
Resolving collateral disputes generally takes the following path:
1) Check the collateral value using market data such as FX rates, interest rates, bond prices, etc.
2) Make sure the Credit Support Annex (CSA) covers the specific securities or locations/branches in question.
3) Check the net collateral requirement vs. thresholds (specific and general).
4) Check rounding amounts (rounding up or down at a specified level of granularity).
6) Perform price change analysis walk-through with counterparty. This helps determine the source of
the valuation issue over time.
7) If the counterparties still cannot agree on the correct amounts, then implement formal dispute resolution
procedures. These should be governed by the appropriate CSA:
a) get additional external quotes (3rd party dealers, banks, valuation consultants, etc.)
b) get one or more appraisals done.

The correct software and systems are crucial for operating an effective collateral management function, due to
the high complexity, large amounts of data, and criticality of the function to the financial and operational health of
the organization.
Key Features of Modern Collateral Management Systems
The following features are considered mandatory for an effective collateral management system. These should
be fully integrated in a single package, and integrated into all existing upstream and downstream software
platforms, such as Trading, Risk, Valuation, Accounting, Know Your Customer, Payment Processing, etc.
- Collateral selection tools: The ability to select collateral from an eligible and available pool.
- Collateral allocation engine: A controlled and accurate matching engine between collateral posted / taken,
customer, trader, deal number, and trade type.
- Sophisticated trade matching algorithms (especially for tri-party systems)
- Speed (real time or near real time)
- Connectivity to multiple dealers and venues: The ability to connect to multiple external systems, both bilateral and tri-lateral, through a common interface.
- Collateral eligibility: Tools to analyze, calculate, and record collateral eligibility under varying conditions and
inventory levels.
- Simulations (exposures with/without different collateral, exposure over time)
- Intraday optimization and rebalancing
- Valuation (real time or EOD, based on various market data inputs, standard valuation models, custom models)
- Monitoring (via blotters, reports, messages, and alerts)
- Rehypothecation
- Inventory management
- Connectivity with other systems: confirmation, settlement engines, trade management systems
- Straight through processing: price, book, confirm, margin calls, collateral inventory, settlements
- Access to underlying data: collateral statements, trade files, reconciliations, market data, trade data,
histories, audit logs
- Management tools: dashboards, etc.
- Reconciliations: Reconciliation between Ours and Theirs view of the portfolio and collateral is automatically
done and messaged/emailed/saved to shared messaging queues.
- Scalable
- Standardized: Cmmunication protocols (e.g. SWIFT), trade/securities definition components, market and
static data, ISDA terms and definitions, etc.
Collateral Management Software and Systems Providers
The following companies offer dedicated collateral management software. Listing here is not a recommendation
to purchase.
- AcadiaSoft (http://www.acadiasoft.com) Collateral messaging and workflow
- Algorithmics (http://www.algorithmics.com) Algo Collateral

- Allustra (http://www.allustra.com) Kyros solution. Acquired by Omgeo (http://www.omgeo.com) in Sept 2008.

- Lombard Risk (http://www.lombardrisk.com) Colline Collateral Management
- SunGard (http://www.sungard.com) Adaptiv Collateral
- SWIFT (http://www.swift.com) Messaging using ISO 15022 securites standards on FIN, message validation,
non-repudiation, guarantee of sender, STP. Swift is a major provider of standardized messaging systems. Has
connectivity to more than 8,300 institutions globally.