Industry Dialogue

Redefining Collateral Management Optimization

Sam Edwards, APAC head of Collateral at State Street, and Chris Watts, co-founder and director at trading and collateral consultancy at Margin Tonic, evaluate the regulatory landscape and the growing importance of collateral optimization.

February 2022

‘Collateral optimization’ has become an increasingly prevalent phrase across the financial services industry and has surged in importance in recent years.

To achieve the traditional definition of post-trade collateral optimization, organizations must source, manage and pledge eligible collateral assets in an efficient way, which both minimizes their funding cost base and their opportunity cost of investment.

Companies can pledge cheaper securities under their collateral agreements, and retain and invest higher-quality securities elsewhere for better returns. Similarly, if organizations use existing securities to meet their collateral requirements, they can save themselves the funding costs of external sourcing.

In September 2021, under Phase 5 of the Uncleared Margin Rules (UMR), hundreds of buy-side firms had a new funding requirement. As a result, these organizations had to start effectively managing and optimizing their new liquidity and collateral needs. This trend will only increase with UMR Phase 6 in September 2022, when the International Swaps and Derivatives Association (ISDA) predicts that almost 800 new buy-side firms will be in-scope.

It’s important for firms to understand their own unique circumstances and choose collateral optimization solutions that will have the greatest positive impact on their profits.

Sam Edwards and Chris Watts discuss their approach to optimizing collateral, and the new solutions and technologies that can help support the demands of buy-side firms.

Click on each section below to see their conversation.