Collateral: Modelling, Pricing and Optimisation

Giovanni Cesari, Zlatko Filipovic and Gordon Lee


There are several ways of mitigating potential future credit exposure with a given client. Among the most common and effective is having collateral agreements in place. Managing collateral pools, and deciding what kind of asset to post to a client and what to do with existing assets in the pool have become extremely challenging for large broker-dealers.

In many financial institutions, collateral management has traditionally been a back-office role. It has mainly consisted of having a team of collateral managers just to ensure that the legal obligations of matching exposure to posting collateral were satisfied. The value of the optimisation of such posting was often secondary to this process.

The 2007–9 global financial crisis has placed the importance of collateral management centre stage. According to the ISDA Margin Survey 2013 report (International Swaps and Derivatives Association 2013), the amount of collateral being called has increased multiple times since the end of 1990s, as we can see from Figure 14.1




Figure 14.1: Growth in value of reported and estimated collateral as of December 2012. Source: International Swaps and Derivatives Association (2013).

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