The obstacles to Collateral Management

by Fleming. Team

How will the new regulations affect collateral management and liquidity in the markets, and what steps should the banks take in order to fulfill them and stay effective at the same time? Read on for insights from Diana Shapiro, NAM Head of Collateral Management at Citi.


What is the biggest obstacle in becoming ready for the new margin requirements?

The most immediate obstacle facing the industry in regards to the new margin requirements, is the ability to put in place the necessary legal documentation by the required regulatory deadlines. Having said this, I think the bigger challenge for firms strategically will be having the full breadth of tools to minimize the cost of these regulatory changes including managing fund performance drag. Buy-side firms will have to make an important decision on the extent they want to leverage external firms and/or build up internal teams and invest in technology to solve for the various challenges.

What do you think banks currently lack in order to be geared for the future challenges?

One area that I think will continue to be a focus is that with the regulatory changes driving a greater demand on high quality liquid assets and a potential rising interest rate environment, there will be a need for market participants to look beyond the immediate operational and legal documentation hurdles and set a strategy to ensure they are optimizing their collateral to minimize funding costs. As a collateral management service provider, we are able to offer the buy side a turnkey solution where they have access to sell-side margin capabilities.

What are the most important parameters when optimizing collateral usage in an organization?

While there are many important factors to an effective collateral optimization strategy, as a service provider, the ones I think that buy-side firms should focus the most on are 1) having the operational and technological capabilities to centralize requirements across asset classes 2) access to analytical tools that can minimize obligations pre-trade and determine the optimal scenarios to reduce the cost of capital post trade and 3) putting the right relationships in place to ensure access to liquidity

What are the main advantages of moving collateral from back office to middle/front office?

While historically seen as a back office function, the increasing reliance on collateral to minimize counterparty risk and meet regulatory requirements, means that collateral challenges now permeate all levels of our client’s organizations. I therefore believe a firm-wide approach to setting a collateral strategy is critical. As collateral directly impacts investment performance, it is important for the front office to take an active role in the strategy and have the right level of visibility/analytics, which will result in rules for the back office to use to efficiently manage collateral. In order to achieve this balance, buy side firms will need to focus resources across the organization and/or partner with external services providers, such as Citi, who can address the concerns of these different constituency groups.

Is there a topic you would like to comment on that you find particularly hot?

Over the past few years, many have written about the definition of liquidity and the impact regulation has had on liquidity in markets. With the next phase of regulatory implementation and the direct impact to the buy-side, there is an increasing correlation between liquidity and collateral. As the rules start to take effect, it will be important to consider the liquidity profile of the composition of funds. What assets need to be set aside for margin? How quickly can funds convert assets to HQLA to meet margin calls under normal and stress scenarios? Portfolio managers will need access to the right information in order to make these strategic decisions.


Find out more at the

Collateral Management Forum