Risk: What are the operational challenges facing collateral managers in this post-Lehman Brothers world?
Simon Lillyston (SL): Eff ective management of exposure and mitigating collateral risks pose massive operational challenges, since, in one way or another, collateralisation becomes predominantly an 'operational risk' management exercise: a highly procedural, middle-office activity involving the simultaneous handling of a large number of ancillary/transferred risks. Many of these risks revolve around both electronic and human interactions with other parts of a firm's business, internal sources of data, trade counterparties,other third parties and external systems. The task of collateral operations is therefore to identify, monitor and manage these risks as efficiently and as completely as possible. Even in the smallest firm, collateralisation depends overwhelmingly on large volumes of time-critical data from inside and outside the fi rm's boundaries - and it all needs to be consumed and collated on a daily or intra-day basis in order to calculate latest margin requirements. Issues of delivery, timeliness, quality and quantity become critical to enabling collateral managers to meet their deadlines. The panic that quickly set in post-Lehman proved that publishing margin calls before deadlines became critical to recovery rates.
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