Michael Simmons - Collateral Management

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MICHAEL SIMMONS

This edition first published 2018
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Library of Congress Cataloging-in-Publication Data

Names: Simmons, Michael, author.
Title: Collateral management : a guide to mitigating counterparty risk / Michael Simmons.
Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2019. |
Series: Wiley finance series | Includes bibliographical references and index. |
Identifiers: LCCN 2018043094 (print) | LCCN 2018044295 (ebook) | ISBN
9781119377108 (Adobe PDF) | ISBN 9781119377122 (ePub) | ISBN 9780470973509
(hardcover)
Subjects: LCSH: Collateralised debt obligations. | Credit derivatives. | Security (Law)
Classification: LCC HG6024.A3 (ebook) | LCC HG6024.A3 S556 2019 (print) | DDC
332.64/5dc23
LC record available at https://lccn.loc.gov/2018043094

A catalogue record for this book is available from the British Library.

ISBN 978-0-470-97350-9 (hardback)
ISBN 978-1-119-37710-8 (ePDF)
ISBN 978-1-119-37712-2 (ePub)
ISBN 978-1-119-37717-7 (obook)

Cover Design: Wiley
Cover Images: KJ_Photography/Shutterstock; agsandrew/Shutterstock; Alex Staroseltsev/Shutterstock; ESB Professional/Shutterstock

For Allyson, Keir and Freya

The collateral management processes rapidly developed during the past decade; after the financial crisis of 2008 there was a significantly greater need to reduce counterparty credit risk in a more efficient way. Not only the market participants but also the regulators expressed this requirement. The G20 summit held in Pittsburgh in 2009 focused on the financial markets and world economy, following which a range of major new regulations were drafted. These were implemented in several phases and are better known as Dodd-Frank and EMIR regulations.

The main reason for a firm to implement a collateral management process is to reduce counterparty credit risk via the exchange of collateral; this is generally achieved via cash or securities. This hasnt changed in essence since the financial crisis; however, the frequency, processes and products covered have changed. The regulations have had a huge impact on the used applications and processes, from additional trade reporting, trade reconciliations, daily margining, lower minimum transfer amounts, same day settlement, through to the exchange of initial margin with central counterparties.

As an industry expert Ive experienced these developments directly, this is also the reason why I would like to share my personal view in this Foreword. Where ten years ago the process was executed by almost every market participant in Excel and Access on a weekly to monthly basis, the financial crisis was definitely the catalyst for change. Software vendors started to build systems supporting the gathering and storing of the most crucial information. This developed further to workflow systems with a high STP rate, often connected to trading systems. Connections were established via APIs, S.W.I.F.T. or SFTP with internally used systems, and with banks, custodians and other service software providers. Alongside such developments new systems assisting the workflow became part of the collateral architectural landscape; some generally accepted systems are triResolve and MarginSphere. (These additional applications will become of considerable benefit to the global collateral environment once adopted by a significant portion of market participants.)

Some years ago the collateral process was mainly focused on bilateral OTC Derivatives, with some additional Repo collateralisation. Now we see many different products subject to collateral, all supported by their own legal documents. Examples of the most frequently traded products in addition to those above are Centrally Cleared Derivatives, Mortgage-Backed Securities and Securities Lending. Additionally, the number of parties now required to exchange collateral has drastically increased due to greater regulation.

As author of this book, Michael Simmons has combined his industry knowledge, training experience and work experience with his enthusiastic interest in collateral management. This book will become essential reading for everyone working within collateral management (whether focused on repo, or securities lending, or derivatives or all three topics), as it touches the necessary level of detail to gain a broad understanding of the products requiring collateral, as well as the collateral management process itself.

Guido Verkoeijen

Team Manager Cash & Collateral Management

APG Asset Management, The Netherlands