Collateral Management
| Date: | May 2007 |
| Author: | Sarah-Jane Dennis |
This report has two purposes: first to establish a common understanding of the major principles involved in collateral management between investment management firms, third party administrators (TPAs) and brokers. Second, the paper expands on and discusses some of the key collateral management issues faced by the member firms of the Investit Intelligence community.
We introduce the basic concepts in collateral management - essentially what it is and how it works. We also look at which OTC derivatives are mainly responsible for generating exposures which need collateralising and the levels of resourcing employed in different categories of investment management firms.
We also introduce some of the main components and parameters needed to govern collateral transactions: why they are needed and why they need to be treated with caution - and new developments in collateral management, such as new types of assets acceptable as collateral against exposures. The paper examines the various elements needed to establish a collateral framework and includes those roles and responsibilities across the firm involved in negotiating collateral management documentation.
The research highlights two approaches to supporting the collateral management operation; buying a best of breed system or outsourcing to a provider. It includes a brief description of vendors in the marketplace providing collateral management in their systems and those TPAs currently supplying collateral management services.
Table of contents
| Management Summary | 1 | |||
| 1.0 | Introduction | 3 | ||
| 2.0 | How Collateral Management Works | 5 | ||
| 2.1 | Collateral management in practice | 6 | ||
| 2.2 | Credit support annexes (CSAs) | 9 | ||
| 2.3 | Issues and themes of collateral management in practice | 12 | ||
| 2.4 | New developments in collateral | 15 | ||
| 3.0 | Negotiating Effective Collateral Management Terms | 17 | ||
| 3.1 | Issues around negotiating ISDAs | 18 | ||
| 3.2 | The process of negotiation | 21 | ||
| 3.3 | Collateral policy | 24 | ||
| 3.4 | Negotiation | 27 | ||
| 3.5 | Developments in ISDA documentation | 34 | ||
| 4.0 | Supporting the Collateral Management Operation | 35 | ||
| 4.1 | Modelling the collateral management activity | 36 | ||
| 4.2 | Levels of infrastructure investment | 38 | ||
| 4.3 | Who pays for collateral management? | 43 | ||
| 5.0 | Options for Implementing Collateral Management | 45 | ||
| 5.1 | Approach to buying a system (or outsourcing) | 46 | ||
| 5.2 | Systems with collateral management functionality | 50 | ||
| 5.3 | Third party providers of collateral management services | 52 | ||
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