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Tag Archive: Collateral (finance)


If you are deployed in the Investment banking space front office, middle office or back office, you should have come across blogphrases such as “collateral liquidity crunch” and “collateral scarcity”, and new terms such as “collateral transformation” and the “collateral upgrade trade.

Came across an interesting paper on Collateral management sharing some of the highlights, need for collateral management, how we got there, some of the Best Practices to collateral.

The 2008 financial crisis and the role derivatives played in it compelled regulators to re-examine and reengineer the entire derivatives market structure. The disruption to the derivatives market is already underway, primarily as a consequence of behemoth regulations such as the Dodd-Frank Act (DFA), European Market Infrastructure Regulation (EMIR), Basel III and others. But new global regulations are not the only driver.  Continue reading

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I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations. images

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.   Continue reading

I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations :-images

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.

However, the safety bid combined with Central Banks monetization of every sovereign risk asset onto their balance sheet has reduced the amount of quality collateral available; this scarcity of quality collateral creates liquidity problems. Continue reading

In one of the speech by Jeremy Stein a Federal Reserve Governor brought on board just last year,received a lot of attention for its imagessuggestion that monetary tools might be used in addressing credit market-overheating. That is an interesting argument, but I don’t want to deal with that today. Rather, I want to look at Stein’s comments on collateral transformation:

Collateral transformation is best explained with an example.

Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral mustbe “pristine”–that is, it has to be in the form of Treasury securities. Continue reading

The crisis has given the birth to new jargon’s and terminologies in the world of financial market, I had tried to
English: The Broker at the Verizon Centeraccumulate few of them from various sources:

  • [h]ypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a  is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default. Continue reading
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