Collateral Management Systems: Keeping an Electronic Eye on Volatile Markets - By: Ned Brumby

Collateral management systems are software applications designed to mitigate credit risks by using regular collateralization. They provide risk management and operations solutions to companies and institutions of varying sizes. By deploying the appropriate technologies they help the client address both internal and regulatory risk management requirements. They also give companies the ability to recognize and manage exposure while ensuring clients receive improved service. These systems do more than act as tools to provide market call insurance, they also provide credit management solutions and valuable information that can serve as warnings and help analyze risk.

Fully integrated collateral management systems facilitate efficient portfolio management in a trading infrastructure. They can also provide a complete solution for managing margin trading for foreign exchange contracts. An effective system provides position and collateral tracking, instant calculation of market requirements, data for position and collateral revaluation and allows users to do instant on-line checks of a clients collateral's current value.

Collateral management systems can play an important role in helping companies to control counterparty risk. Recent experience has shown the need to deal with counterparties on a collateralized basis. Older systems expose investors to unnecessary risk in today's volatile market by using end-of-day reporting systems. Effective new systems for managing collateral provide real-time financial information. They also mitigate counterparty risk by enabling clients to open accounts and trade using a range of financial instruments.

These systems manage credit risk and collateralized trading in money markets, bonds, commodity futures, equities and other asset classes. They also support multi-dimensional market risk changes and provide valuable client services. These systems can add some measure of predictability and safety to securities lending. They can also reduce the risk involved in a wide range of banking transactions by employing banking software for use in processing commercial and small business credit applications. This banking software reduces turnaround time on the applications and assesses risk. It also standardizes transaction processing yet is flexible enough handle complex high-end corporate financing requests. The banking software can also review all of a customer's accounts and provide a detailed report showing the entire history of the customer's interaction with the bank including collateral, credit, fee and deposit accounts.

Collateral management systems can improve overall efficiency by capturing data from different files and formats, converting data into an easily readable format and storing it into a central data base, generating reports and disseminating reports and auditing broker margin data. Securities lending and other financial processes would be subject to greater risk due to banks and other financial institutions inability to offset the volatility of the financial markets with the real-time information the systems provide.

Risk management is an important key for successful asset management across a wide range of markets using a wide variety of financial instruments. Risk professionals utilize systems that manage collateral because market behaviour can change dramatically in an instant. It is important to use a risk management structure with a variety of tools including the ability to proactively investigate and report potentially distressing trends in real time. Securities lending, bonds, futures markets, equities, margin trading, success with all of these financial instruments hinge on the quick, accurate information automated systems for managing collateral provide. Financial transactions are increasingly being collateralized to mitigate risk. An automated system to manage collateral is a key to success.

About the Author

Collateral management systems support multi-dimensional market risk changes and provide valuable client services. These systems can add some measure of predictability and safety to securities lending.

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