The process of putting up collateral in exchange for a loan has long been a part of the lending process between businesses. With more institutions seeking credit, along with the introduction of new forms of technology, the scope of collateral management system has grown. Increased risks in the field of finance have inspired greater responsibility on the part of borrowers, and it is the aim of a collateral management system to ensure that the risks are as long as possible for the parties involved.
For the buy side, which includes asset manager and corporate treasury, a collateral management system will minimize collateral amounts by cross-collaterization, and minimize collaterize movements and give and take collateral on a net basis. It will also collaterize exposures by client. For the sell side, which includes broker dealers and banks, a collateral management system will reduce capital charge to allocate for asset liability management, and many others. Below are a few more significant benefits of having a collateral management system for your business.
- Reduced credit risk. A collateral management system allows for mitigation of current and potential exposure to losses brought about by the nonpayment by a counterparty.
- Capital savings. Collaterizing and netting counterparty exposures will reduce the amount of economic capital needed to cover credit risk and balance sheet protection. This should allow leverage and profit potential of the assets of a bank.
- Increased competitiveness. The ability to trade in a wide range of markets where the margins might be higher or profits more predictable.
- Improved market liquidity. A collateral management system gives increased opportunity to do more transactions in the markets with less capital and less time required to credit review and settlement.
- Access to higher risk trades. With a collateral management system, there is a reduced risk of illiquid or new trade types that have higher risk but higher profit margins.
- More efficient trading between counterparts. Collaterization will formalize an ongoing relationship and make transactions and payments smoother, with more opportunity to check valuations and balance the gains and losses in a standard and repeatable manner.