Before the 2007 financial crisis, collateral management was just a simple, cash-denoted process to ensure firms against the risk of default by their counterparties. But, regulatory aftershocks in the form of European Market Infrastructure Regulation (EMIR), Dodd-Frank’s Title VII and the Alternative Investment Fund Managers Directive (AIMFD) disrupted traditional cash models for collateralization.
New laws require that banks fund deals over longer terms while holding more capital against unsecured trades.
Buy-side firms, on the other hand, have to exchange their high-yielding instruments for cash and government bonds to meet regulatory demands for higher quality and more diverse collateral.
In the OTC derivatives market, collateral management has become more than a risk-management tool – it’s a strategic process to drive profitability.
The collateralization of OTC derivative contracts optimizes efficiencies between counterparties by reducing credit risk, improving pricing and expanding market access.
The practice of collateral management has existed since the 1980s when Bankers Trust and Salomon Brothers began taking collateral against credit exposure.
Derivative collateralization became more prevalent in the 90s, which led to the development of standardized rules by the International Swaps and Derivatives Association in 1994.
Now Collateral Management has come to Pre Trade Booking and it has become the mandatory exercise to mitigate Risk. And Excel Sheet is not going help much in this direction.
Firms need a simple yet detailed oriented system to manage collateral and we provide such a system which has balanced automation.