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Collateral Management

Book Description

Insight into collateral management and its increasing relevance in modern banking

In the wake of recent financial crises, firms of all sizes have adjusted their policies to incorporate more frequent instances of collateral management. Collateral Management: A Guide to Mitigating Counterparty Risk explains the connection between the need for collateral management in order to alleviate counterparty risk and the actions that firms must take to achieve it. Targeted at middle and back office managers seeking a hands-on explanation of the specifics of collateral management, this book offers a thorough treatment of the subject and attends to details such as internal record management, daily procedures used in making and receiving collateral calls, and settlement-related issues that affect the movements of cash and securities collateral. An expert in financial topics ranging from trade lifecycle to operational risk, author Michael Simmons offers readers insight into a field that, so far, is struggling to produce enough expertise to meet its high demand.

  • Presents hands-on advice and examples from a bestselling, internationally renowned author who introduces his third book on operations and operations-related activities
  • Explains the relationship between collateral management and preventing institutional defaults, such as the recent Lehman Brothers downfall

Since 2008, firms have recognized and embraced the importance of collateral management, but this book will provide practitioners with a deeper understanding and appreciation of its relevance.

Table of Contents

  1. Cover
  2. Foreword
  3. Acknowledgements
  4. About the Author
  5. Introduction
  6. Part 1 Introductory Elements
    1. Chapter 1 Fundamental Collateral Concepts
    2. Chapter 2 The Nature and Characteristics of Collateral Types
      1. 2.1 Cash Collateral: Overview
      2. 2.2 Bond Collateral: Overview
      3. Note
  7. Part 2 Sale & Repurchase (Repo) Trades and Collateral
    1. Chapter 3 Sale & Repurchase (Repo) Trades and Collateral – Introduction to Repo
      1. 3.1 Introduction to Repo
      2. 3.2 Participants in the Repo Marketplace
    2. Chapter 4 Sale & Repurchase (Repo) Trades and Collateral – Classic Repo Trades
      1. 4.1 Cash-Based Classic Repo Transactions
    3. Chapter 5 Sale & Repurchase (Repo) Trades and Collateral – The Repo Trade Lifecycle
      1. Introduction
      2. 5.1 Pre-Trading
      3. 5.2 Trade Execution
      4. 5.3 Pre-Settlement
      5. 5.4 Settlement of Opening Leg
      6. 5.5 Throughout Lifetime of Trade
      7. Evening of Thursday 8th June 2017
      8. Morning of Friday 9th June 2017
      9. Evening of Friday 9th June 2017
      10. Morning of Monday 12th June 2017
      11. Evening of Monday 12th June 2017
      12. Morning of Tuesday 13th June 2017
      13. 5.6 Settlement of Closing Leg
    4. Chapter 6 Sale & Repurchase (Repo) Trades and Collateral – Stock-Based Classic Repo Trades
    5. Chapter 7 Sale & Repurchase (Repo) Trades and Collateral – Repo Trade Variations
      1. 7.1 Buy/Sell Backs (Overview)
      2. 7.2 Tri-Party Repo (Overview)
      3. 7.3 Delivery by Value (Overview)
      4. 7.4 Repo Central Clearing (Overview)
      5. 7.5 GC Pooling (Overview)
      6. 7.6 RepoClear (Overview)
    6. Chapter 8 Sale & Repurchase (Repo) Trades and Collateral – The Global Master Repurchase Agreement
  8. Part 3 Securities Lending & Borrowing and Collateral
    1. Chapter 9 Securities Lending & Borrowing and Collateral – Introduction to SL&B
      1. 9.1 Introduction to Securities Lending
      2. 9.2 Introduction to Securities Borrowing
    2. Chapter 10 Securities Lending & Borrowing and Collateral – Principles of SL&B
      1. 10.1 Principles of Securities Lending
      2. 10.2 Principles of Securities Borrowing
      3. 10.3 Lendable and Borrowable Assets
      4. 10.4 Participants in the Securities Lending & Borrowing Marketplace: Introduction
      5. 10.5 Securities Lending & Borrowing: Legal Documentation
      6. 10.6 Securities Lending & Borrowing and Collateral
      7. 10.7 Conclusion
      8. Note
    3. Chapter 11 Securities Lending & Borrowing and Collateral – The SL&B Trade Lifecycle
      1. 11.1 Pre- Trading
      2. 11.2 Trade Execution
      3. 11.3 Pre-Settlement
      4. Trade Date: 28th October
      5. 11.4 Settlement of Opening Leg
      6. Opening Value Date: 29th October
      7. 11.5 Throughout Lifetime of Trade
      8. Opening Value Date +1: 30th October
      9. Opening Value Date +2: 31st October
      10. Opening Value Date +3: 1st November
      11. Opening Value Date +4: 2nd November
      12. 11.6 Recall and Return of Securities
      13. 11.7 Settlement of Closing Leg
      14. Closing Value Date: 3rd November
      15. 11.8 Settlement of Fees & Rebates
      16. 11.9 Additional Factors
    4. Chapter 12 Securities Lending & Borrowing and Collateral – Accessing the SL&B Marketplace
      1. 12.1 Routes to Market
      2. 12.2 Collateral Management
    5. Chapter 13 Securities Lending & Borrowing and Collateral – The Global Master Securities Lending Agreement
  9. Part 4a OTC Derivatives and Collateral
    1. Chapter 14 OTC Derivatives and Collateral – Transaction Types – Introduction
      1. 14.1 Exchange-Traded Derivatives
      2. 14.2 OTC Derivatives
      3. 14.3 Exchange-Traded Derivatives Versus OTC Derivatives: Summary
      4. 14.4 The Future of OTC Derivatives
    2. Chapter 15 OTC Derivatives and Collateral – Transaction Types – Generic Structural Aspects
      1. 15.1 OTC Derivative Products
      2. 15.2 OTC Derivative Trades – Generic Trade Components and Subsequent Actions
      3. 15.3 OTC Derivatives: Trade Processing and Collateral Processing
      4. 15.4 OTC Derivatives: Exposure and Collateral Management
    3. Chapter 16 OTC Derivatives and Collateral – Transaction Types – Interest Rate Swaps
      1. 16.1 Definition
      2. 16.2 Purpose
      3. 16.3 Trade Components
      4. 16.4 Interest Payment Calculation
      5. 16.5 IRS Operations Activity: Overview
      6. 16.6 IRS and Collateral Management
    4. Chapter 17 OTC Derivatives and Collateral – Transaction Types – Credit Default Swaps
      1. 17.1 Definition
      2. 17.2 Purpose
      3. 17.3 Trade Components
      4. 17.4 Cost of Protection
      5. 17.5 Credit Events
      6. 17.6 CDS Operations Activity: Overview
      7. 17.7 Settlement Following Credit Events
      8. 17.8 The Protection Seller’s Risk
      9. 17.9 CDS and Collateral Management
      10. 17.10 CDS Variations
    5. Chapter 18 OTC Derivatives and Collateral – Transaction Types – Foreign Exchange Swaps
      1. 18.1 Definition
      2. 18.2 Purpose
      3. 18.3 Trade Components
      4. 18.4 FXS Operations Activity: Overview
      5. 18.5 Foreign Exchange Swaps and Collateral Management
      6. 18.6 Foreign Exchange Swap Variations
    6. Chapter 19 OTC Derivatives and Collateral – Transaction Types – Cross-Currency Swaps
      1. 19.1 Definition
      2. 19.2 Purpose
      3. 19.3 Trade Components
      4. 19.4 CCS Operations Activity: Overview
      5. 19.5 Cross-Currency Swaps and Collateral Management
      6. 19.6 Cross-Currency Swap Variations
    7. Chapter 20 OTC Derivatives and Collateral – Legal Protection – Introduction
      1. Note
    8. Chapter 21 OTC Derivatives and Collateral – Legal Protection – Master Agreement and Schedule
      1. 21.1 Introduction
      2. 21.2 Content of the ISDA Master Agreement
      3. 21.3 Content of the Schedule to the Master Agreement
      4. 21.4 Negotiating and Signing the Document Framework
      5. 21.5 Trading Following Signing of Document Framework
      6. 21.6 Trade Confirmation
      7. 21.7 Summary
    9. Chapter 22 OTC Derivatives and Collateral – Legal Protection – Credit Support Annex
      1. 22.1 Introduction
      2. 22.2 Signing of CSA and Trade Execution
      3. 22.3 New versus Old CSAs
      4. 22.4 OTC Derivative Exposures
      5. 22.5 CSA Legal Structures
      6. 22.6 Responsibilities Under the CSA: Overview
      7. 22.7 Day-to-Day Use of the CSA
      8. 22.8 CSA Components
      9. 22.9 Ownership of Collateral
      10. 22.10 Example Negotiated CSAs: Overview
      11. 22.11 Party Liquidation: Impact on Collateral
      12. 22.12 Conclusion
    10. Chapter 23 OTC Derivatives and Collateral – Static Data
      1. 23.1 Introduction
      2. 23.2 Static Data and New OTC Derivative Trades
      3. 23.3 Static Data and Collateral Management
      4. 23.4 How Software Systems Hold Collateral-Related Static Data
      5. 23.5 Sources of Static Data
      6. 23.6 Setting Up of and Maintenance of Static Data
      7. 23.7 Conclusion
      8. Note
    11. Chapter 24 The OTC Derivative Collateral Lifecycle
      1. 24.1 The OTC Derivative Collateral Lifecycle – Introduction
    12. Chapter 25 OTC Derivatives and Collateral – The Collateral Lifecycle – Pre-Trading – Legal Documentation
    13. Chapter 26 OTC Derivatives and Collateral – The Collateral Lifecycle – Pre-Trading – Static Data
    14. Chapter 27 OTC Derivatives and Collateral – The Collateral Lifecycle – Trading – Trade Execution
      1. 27.1 Trade Execution: Introduction
      2. 27.2 Trade Execution Methods
      3. 27.3 Trade Execution, Trade Processing and Collateral Processing
      4. 27.4 Trade Execution and Future Cashflow Discounting
      5. 27.5 Conclusion
    15. Chapter 28 OTC Derivatives and Collateral – The Collateral Lifecycle – Post-Trading – Trade Capture
      1. 28.1 Trade Capture: Introduction
      2. 28.2 Trade Capture within Separate Trading and Operations Systems
      3. 28.3 Trade Capture within a Single Trading and Operations System
      4. 28.4 Trade Reference Numbers
      5. 28.5 Trade Capture Error Identification
      6. 28.6 Trade Capture and Collateral Management
      7. 28.7 Conclusion
      8. Note
    16. Chapter 29 OTC Derivatives and Collateral – The Collateral Lifecycle – Post-Trading – Trade Confirmation/Affirmation
      1. 29.1 Trade Confirmation/Affirmation: Introduction
      2. 29.2 Trade Confirmation versus Trade Affirmation
      3. 29.3 Electronic Trade Confirmation/Affirmation
      4. 29.4 Conclusion
    17. Chapter 30 OTC Derivatives and Collateral – The Collateral Lifecycle – Post-Trading – Trade/Portfolio Netting
      1. 30.1 Introduction
      2. 30.2 Benefits of Trade/Portfolio Netting (Portfolio Compression)
      3. 30.3 The Trade/Portfolio Netting (Portfolio Compression) Process
      4. 30.4 Internal Treatment of Netted (Compressed) Trades
      5. 30.5 The Future of Trade/Portfolio Netting (Portfolio Compression)
      6. 30.6 Conclusion
    18. Chapter 31 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Portfolio Reconciliation
      1. 31.1 Introduction
      2. 31.2 Purpose of Portfolio Reconciliation
      3. 31.3 Reasons for Portfolio Discrepancies
      4. 31.4 Advantages and Disadvantages of Portfolio Reconciliation
      5. 31.5 The Portfolio Reconciliation Process
      6. 31.6 Conclusion
      7. Note
    19. Chapter 32 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Marking-to-Market
      1. 32.1 Introduction
      2. 32.2 Generic Marking-to-Market Principles
      3. 32.3 The Origin of Prices
      4. 32.4 Uses of Marking-to-Market
      5. 32.5 Trends in Marking-to-Market Frequency
    20. Chapter 33 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Exposure Calculation
      1. 33.1 Introduction
      2. 33.2 Credit Support Annex
      3. 33.3 Determining Exposure Amounts and Direction
      4. 33.4 Cash Collateral versus Bond Collateral
      5. 33.5 Exposures on Individual Trades versus Portfolios
      6. 33.6 Conclusion
    21. Chapter 34 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Receiving Margin Calls
      1. 34.1 Introduction
      2. 34.2 Incoming Margin Call: Both Cash and Securities Collateral
      3. 34.3 Incoming Margin Call: Cash Collateral
      4. 34.4 Incoming Margin Call: Securities Collateral
      5. Determining Haircut Percentage: Example Calculations
      6. 34.5 Conclusion
    22. Chapter 35 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Issuing Margin Calls
      1. 35.1 Introduction
      2. 35.2 Issuing a Margin Call Notification
      3. 35.3 Collateral Proposed by Counterparty
      4. 35.4 Verifying the Counterparty’s Proposed Collateral
      5. 35.5 Transaction Capture
      6. 35.6 Actioning Receipt of Incoming Collateral
      7. 35.7 Monitoring Receipt of Collateral
      8. 35.8 Updating Books & Records
      9. 35.9 Performing Reconciliation
      10. 35.10 Updating Records of Cumulative Collateral
      11. 35.11 Conclusion
      12. Note
    23. Chapter 36 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Holding Collateral
      1. 36.1 Introduction
      2. 36.2 Legal Structures Impacting the Holding of Collateral
      3. 36.3 Reuse and Rehypothecation of Collateral: Benefits and Risks
      4. 36.4 Holding Bond Collateral with Reuse and Rehypothecation Rights
      5. 36.5 Holding Bond Collateral without Rehypothecation Rights
      6. 36.6 Holding Collateral and Operational Control
      7. 36.7 Bond Collateral
      8. 36.8 Cash Collateral
      9. 36.9 Conclusion
      10. Note
    24. Chapter 37 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Introduction
    25. Chapter 38 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Novation
      1. 38.1 Introduction
      2. 38.2 Reasons for Novation
      3. 38.3 Impact of Novation on Books & Records
      4. 38.4 Impact of Novation on Collateral Management
      5. 38.5 Conclusion
    26. Chapter 39 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Unwind
      1. 39.1 Introduction
      2. 39.2 Reasons for Unwinding
      3. 39.3 Impact of Unwinding on Books & Records
      4. 39.4 Impact of Unwinding on Collateral Management
      5. 39.5 Conclusion
    27. Chapter 40 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Offset
      1. 40.1 Introduction
      2. 40.2 Reasons for Offsetting
      3. 40.3 Impact of Offsetting on Books & Records
      4. 40.4 Impact of Offsetting on Collateral Management
      5. 40.5 Conclusion
    28. Chapter 41 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Post-Trade Execution Events – Credit Events
      1. 41.1 Introduction
      2. 41.2 Impact of Credit Events on Books & Records
      3. 41.3 Impact of Credit Events on Collateral Management
      4. 41.4 Conclusion
    29. Chapter 42 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Collateral Substitution
      1. 42.1 Introduction
      2. 42.2 Reasons for Collateral Substitution
      3. 42.3 The Process of Collateral Substitution
      4. 42.4 Risks in Settlement of Collateral Substitution
      5. 42.5 Urgency of Collateral Substitution
      6. 42.6 Impact of Collateral Substitution on the Collateral Taker
      7. 42.7 Unwanted Exposures in Collateral Substitution
      8. 42.8 Updating Books & Records
      9. 42.9 Conclusion
    30. Chapter 43 OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Income & Corporate Action Events
      1. 43.1 Introduction
      2. 43.2 Bond Collateral and Coupon Payments
      3. 43.3 Bond Collateral and Corporate Actions
      4. 43.4 Conclusion
    31. Chapter 44 OTC Derivatives and Collateral – The Collateral Lifecycle – Trade Termination – Trade Termination
  10. Part 4b OTC Derivatives and Collateral – Legal Documentation
    1. Chapter 45 OTC Derivatives and Collateral – Legal Documentation
  11. Part 4c OTC Derivatives and Collateral – Regulatory Change and the Future of Collateral
    1. Chapter 46 OTC Derivatives and Collateral – Regulatory Change and the Future of Collateral – Introduction
      1. 46.1 Introduction
      2. 46.2 The Need for Regulatory Change
      3. 46.3 Regulatory Changes: Introduction
      4. 46.4 Exchanges and Electronic Trading Platforms: Overview
      5. 46.5 Central Clearing: Overview
      6. 46.6 Trade Repositories: Introduction
      7. 46.7 Centrally Cleared and Non-Centrally Cleared Trades
    2. Chapter 47 OTC Derivatives and Collateral – Regulatory Change and the Future of Collateral – Centrally Cleared Trades
      1. 47.1 Introduction
      2. 47.2 Fundamental Central Counterparty Concepts
      3. 47.3 Central Counterparty Operation and Services
      4. 47.4 Central Clearing: Advantages & Disadvantages
      5. 47.5 Central Counterparty Membership and Non-Membership
      6. 47.6 Clearing Member Margin Requirements
      7. 47.7 Initial Margin and Variation Margin: Impact on Sell-Side and Buy-Side Firms
      8. 47.8 Clearing Member Requirements: Overview
      9. 47.9 Clearing Members and their Clients: Account Structures
      10. 47.10 The Clearing Obligation
      11. 47.11 Treatment of Legacy Trades
      12. 47.12 Central Counterparties and Interoperability
      13. 47.13 Product, Party and Trade-Related Static Data
      14. 47.14 Operational Implications of Central Clearing: Overview
      15. 47.15 Legal Documentation: Overview
      16. 47.16 Status of Individual Central Counterparties
      17. 47.17 Central Clearing and the OTC Derivative Collateral Lifecycle
      18. 47.18 Collateral Transformation
    3. Chapter 48 OTC Derivatives and Collateral – Regulatory Change and the Future of Collateral – Non-Centrally Cleared Trades
      1. 48.1 Introduction
      2. 48.2 Reasons for the Existence of Non-Centrally Cleared Trades
      3. 48.3 Market Participants Executing Non-Centrally Cleared Trades
      4. 48.4 Non-Centrally Cleared Trades: Margin Regulations
      5. 48.5 Non-Centrally Cleared Trades: Legal Documentation
      6. 48.6 Non-Centrally Cleared Trades: Further Risk Mitigation Regulations
      7. 48.7 Non-Centrally Cleared Trades: Trade Reporting Regulations
      8. Note
  12. Glossary of Terms
  13. Useful Websites
  14. Further Reading
  15. Index
  16. End User License Agreement