What Are The Services Included In Colleteral Management?
One definition of collateral management services is the process of exchanging assets between parties in order to reduce the credit risk associated with unsecured financial transactions. Banks, hedge funds, broker-dealers, asset managers, pension funds, and large corporations are all examples of counterparties. Collateral management is based on a straightforward principle: one counterparty transfers cash or securities to another in exchange for credit.
Deals Between Two Parties
In OTC (Over The Counter) markets, it is common for collateral to be moved. The repos or repurchase agreements, cash loans backed by securities, are the most well-known collateralised transactions. Securities lending and borrowing are both ways of getting cash or other securities in exchange for a loan of securities. On the OTC derivatives market (swaps and credit derivatives), it has also become common to back transactions with collateral.
Then, the rules for handling collateral are usually set out in a bilateral agreement, a legal contract signed by both sides before negotiations begin. The agreement spells out several things, which will be explained in more detail below. These include the types of assets that can be used as collateral, the rules for figuring out how much these assets are worth, the levels at which margin calls can be made, whether the collateral management services received can be used again ("rehypothecation"), etc.
Taking Part in Clearing
Most of the time, a clearing house works with organised markets for securities or derivatives. The clearing house takes the participants' place, becoming both the buyer and the seller for everyone (novation mechanism). So, it takes on the risk of the other party instead of them. To protect against this risk, it will ask for security deposits or collateral, whose value will be based on how many positions each participant opens. Margin calls happen when these positions are re-evaluated daily based on market prices.
Refinancing is What the Central Bank Does
A country's central bank is one place where commercial banks can get money. In the Eurosystem, as in most other countries, the central bank will only give these loans if there is bank collateral management system cms to back them up. Such guarantees could be securities that can be bought and sold. The list of securities that the Eurosystem can refinance is updated regularly and posted on the ECB website. Credit institutions can also use credit claims on non-financial debtors (like corporations) as collateral. This is similar to the old practice of "discounting," which is no longer used. There are also rules about what kinds of claims can be made here.
Conclusion
In the financial industry, bank collateral management system cms is increasingly used, becoming a fundamental way for many organisations to reduce risk.