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How can you maximize collateral transparency and accountability?

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Collateral is any asset or security that a borrower pledges to a lender as a guarantee of repayment. Collateral management is the process of ensuring that the collateral is sufficient, eligible, and accessible in case of default or margin calls. In the context of risk management, collateral transparency and accountability are essential to reduce credit risk, operational risk, and regulatory risk. In this article, you will learn how to maximize collateral transparency and accountability by following these five best practices.

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Terry Barton

Ex money market and repo trader
Shahzad Qamar

Assistant Manager | Credit Risk | FINCA Bank(USA based Bank)

1 Define clear policies and procedures

The first step to maximize collateral transparency and accountability is to define clear policies and procedures for collateral management. These should cover the types and sources of collateral, the valuation and haircut methods, the margining and reporting frequency, the dispute resolution and escalation mechanisms, and the roles and responsibilities of the parties involved. Having clear policies and procedures will help you establish a common understanding and a consistent approach to collateral management, as well as comply with relevant regulations and standards.

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Terry Barton

Ex money market and repo trader
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This is crucial. The cost of collateral is all-important, especially in terms of haircuts and other charges. Don't assume you know the costs, these can change frequently and significantly.

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2 Implement robust systems and controls

The second step to maximize collateral transparency and accountability is to implement robust systems and controls for collateral management. These should include automated and integrated platforms that can handle the entire collateral lifecycle, from data collection and analysis, to allocation and optimization, to settlement and reconciliation. Robust systems and controls will help you improve the accuracy and efficiency of collateral management, as well as reduce the operational risk and cost associated with manual and fragmented processes.

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Terry Barton

Ex money market and repo trader
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In my experience, a close relationship between front and back office is essential to ensure everyone is on the same page about where collateral is, what it's being used for, how quickly it can be recalled and whether it's being used for the best purpose.

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Shahzad Qamar

Assistant Manager | Credit Risk | FINCA Bank(USA based Bank)
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To maximize collateral transparency and accountability is to implement robust systems and controls for collateral management. These should include automated and integrated platforms that can handle the entire collateral lifecycle, from data collection and analysis, to allocation and optimization, to settlement and reconciliation. Robust systems and controls will help you improve the accuracy and efficiency of collateral management, as well as reduce the operational risk and cost associated with manual and fragmented processes.

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3 Monitor and measure collateral performance

The third step to maximize collateral transparency and accountability is to monitor and measure collateral performance on a regular basis. This means tracking and reporting the key metrics and indicators that reflect the quality, liquidity, and availability of collateral, such as the collateral coverage ratio, the collateral utilization rate, the collateral substitution rate, and the collateral haircuts. Monitoring and measuring collateral performance will help you identify and address any issues or gaps in collateral management, as well as optimize the use and allocation of collateral.

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Terry Barton

Ex money market and repo trader
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Another key message which I agree with. Collateral management is an ongoing process, metrics need to be refreshed frequently and policies adapted as necessary.

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4 Communicate and collaborate with stakeholders

The fourth step to maximize collateral transparency and accountability is to communicate and collaborate with stakeholders involved in collateral management. These may include internal departments, such as treasury, risk, compliance, and audit, as well as external parties, such as counterparties, custodians, clearing houses, and regulators. Communicating and collaborating with stakeholders will help you align expectations and objectives, share information and feedback, resolve disputes and discrepancies, and ensure compliance and auditability.

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Terry Barton

Ex money market and repo trader
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Yes, all stakeholders need to be kept informed. Nothing should ever be a surprise. Regular communication is essential to ensure collateral is not pledged to the wrong place or for an unsuitable amount of time.

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5 Review and update collateral practices

The fifth and final step to maximize collateral transparency and accountability is to review and update collateral practices periodically. This means evaluating the effectiveness and efficiency of your current policies, procedures, systems, controls, metrics, and indicators, as well as identifying any areas for improvement or innovation. Reviewing and updating collateral practices will help you adapt to the changing market conditions, regulatory requirements, and customer demands, as well as enhance your competitive advantage and reputation.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you maximize collateral transparency and accountability?

1

2

3

4

5

6

1 Define clear policies and procedures

2 Implement robust systems and controls

3 Monitor and measure collateral performance

4 Communicate and collaborate with stakeholders

5 Review and update collateral practices

6 Here’s what else to consider

Risk Management

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How can you maximize collateral transparency and accountability?

1

2

3

4

5

6

1 Define clear policies and procedures

2 Implement robust systems and controls

3 Monitor and measure collateral performance

4 Communicate and collaborate with stakeholders

5 Review and update collateral practices

6 Here’s what else to consider

Risk Management

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