Collateral is used across the industry to support trading, payments, clearing and settlement, and yet every organisation manages and represents it differently, whether this is in a bi-lateral or tri-party arrangement. ISLA has been working in conjunction with other trade associations to harmonise the representation of collateral, enabling organisations to use the CDM for enterprise-wide collateral management.
The CDM has become recognised by banks, vendors and agents for its ability to standardise the representation and processing of collateral across operations. The key areas the industry can benefit from using the CDM are in the fields of:
Collateral Efficiency vs Fragmentation
Collateral management has become increasingly important both at a micro and macroprudential level with organisations needing to adopt the right technology solutions to address operational risk, manage and monitor exposure, and have reliable and highly automated management processes.
During times of market stress, credit risk caused by market conditions can be mitigated by the ability to swiftly mobilise collateral, this ability being greatly improved through streamlined processes. Coupled with the use of standardised representations and functions to define haircuts, margins and workflows, exposure can also be managed more effectively.
Fragmentation of collateral efficiency occurs because collateral is represented, managed and processed differently by each organisation. This is further exacerbated by firms treating each trading domain, and even individual instruments, differently. This leads to market inefficiency and hampers liquidity.
The CDM provides a harmonised approach to collateral, enabling institutions to manage their entire collateral lifecycle at an enterprise level, facilitating a unified view of their collateral. When groups of institutions with common trading relationships using the CDM to represent their collateral functions, it provides greater transparency and efficiency at market level, potentially reducing systemic risk. Tri-party agents will service many of the same clients and a standard representation of the collateral held by triparty agents on behalf of their clients (both borrowers and lenders) would enable better cross-institution optimisation15 and better mobility, essentially reducing fragmentation and improving efficiency.
As demonstrated above, the CDM delivers on all these areas of collateral management, which has resulted in its uptake by market participants to centrally manage collateral across securities lending, repo and derivatives.
This article is an excerpt from our ‘CDM: The Road to Adoption’ report – click here to read the full report.
