Collateral Management for Corporates
by Anthony van Eden, Strategic Projects Director, Strate
The global financial industry is in the midst of a period of unprecedented change as it navigates the aftershocks of the 2007-2008 banking crisis. Adapting to these changes is the biggest challenge financial institutions have faced for a long time.
Counterparty credit risk, asset safety and transparency rose to the fore following the collapse of many large institutions. The realm of securitised borrowing and lending has traditionally been limited to pockets of banking and central bank activities, whereas elsewhere, unsecured bank deposits were common and went unquestioned.
As a value proposition, collateralising a loan or term deposit provides greater asset safety and protection from counterparty credit risk.
However, lessons from the crisis have culminated in regulatory changes in the financial sector to ensure greater financial stability and mitigation of systemic risk through the collateralisation of financial exposures and debt obligations.
As a value proposition, collateralising a loan or term deposit provides greater asset safety and protection from counterparty credit risk. Collateral can be in the form of government bonds, corporate debt, money market securities and equities. A simple example of a collateralised term deposit:
First leg of the deposit:
Should a corporate wish to deposit cash with a bank, then the following roles will apply:
- The corporate as the cash provider and collateral receiver; and
- The bank as the cash receiver and collateral provider.
Second leg of the deposit:
Should a corporate wish to recall the cash for other purposes:
- The corporate will receive the cash and return collateral to the bank; and
- The bank will return the cash and receive the collateral.
South African Central Securities Depository Strate, as South Africa’s first independent tri-party collateral agent, will ensure that the entire collateralisation process runs smoothly by continuing to monitor the value of the collateral the corporate has received for the duration of the term deposit, perfecting any pledge of securities and tracking any reuse of collateral received through a cession. Its service automatically performs collateral substitution, additional collateral calls and returns as well as any corporate actions or capital events relevant to securities placed or received as collateral. Furthermore, as a receiver of non-cash collateral, there is no charge for this all-encompassing service.
The service enables corporates to control exactly which collateral it is that they are willing to accept through Strate’s highly customisable eligibility criteria, as well as managing its concentration limits.