As credit management has become a major concern in today’s market, it is extremely important for firms to continually assess their liquidity and exposure to counterparties. One of the best ways to proactively manage these risks is through a collateral management system.
Collateral management involves the effective handling of legal agreements, collateral valuations, and operational workflows so that firms can be sure that their positions and counterparty exposure calculations are accurate.
In order to improve transparency and reduce counterparty risk, Dodd-Frank and other regulations mandate that standardized OTC derivatives be traded on an exchange or regulated trading platform, cleared through central counterparties (CCPs) and reported to a trade repository. With trades dispersed across multiple clearing venues, the ability of firms to “net out” with counterparties is diminished. Furthermore, CCPs typically have a more restricted list of assets that they are willing to accept as collateral – a particular challenge when traditional AAA assets are downgraded.
Our collateral management system functionality supports both cleared and un-cleared OTC derivative trades. It provides real-time information across credit support annexes (CSAs) terms for bi-lateral counterparties and central counterparties (CCPs) and counterparty netting agreements.
Using our system, firms can quickly decide on the most efficient use of collateral and trade with counterparties who offer the most favorable CSA terms for the assets they are willing to accept as collateral. Furthermore, with full visibility of CSA terms, firms can put in place contingencies to post additional collateral in the event of a downgrade to the assets they are holding.