How can you ensure collateral is properly marked-to-market?

2 Apply haircuts and thresholds

The second step is to apply haircuts and thresholds to your collateral. A haircut is a percentage discount that is applied to the value of the collateral to account for its liquidity, volatility, or credit risk. A threshold is a minimum amount of exposure or variation margin that triggers a collateral transfer. Haircuts and thresholds can help you reduce the operational costs and risks of frequent collateral movements, as well as provide a buffer against market fluctuations.

3 Monitor the collateral position

The third step is to monitor the collateral position on a regular basis. You should compare the value of the collateral with the value of the exposure or the variation margin, and calculate the net collateral balance. If the balance is positive, it means that you have excess collateral and you can request a return. If the balance is negative, it means that you have a collateral shortfall and you need to make a transfer.

4 Manage the collateral disputes

The fourth step is to manage the collateral disputes that may arise from different valuation methods, sources, or data. You should have a clear and efficient dispute resolution process that defines the roles and responsibilities of the parties, the escalation procedures, and the time limits. You should also keep a record of the disputes and their outcomes, and communicate regularly with your counterparties to resolve them as soon as possible.

5 Review the collateral performance

The fifth step is to review the collateral performance periodically. You should analyze the trends and patterns of the collateral value, exposure, margin, haircuts, thresholds, transfers, and disputes. You should also evaluate the effectiveness and efficiency of your collateral management process, and identify any issues or risks that need to be addressed or mitigated. You should also update your collateral agreement or master agreement if there are any changes in the market conditions, regulations, or business objectives.

6 Follow the industry standards

The sixth step is to follow the industry standards and best practices for collateral management. You should comply with the relevant rules and guidelines issued by the regulators, such as the Basel III framework, the Dodd-Frank Act, or the European Market Infrastructure Regulation. You should also adopt the common conventions and protocols developed by the industry associations, such as the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association, or the Global Master Repurchase Agreement.