Collateral Optimization – Liquidity & Funding Value Adjustments, Best Practices (Août 2013) by David REGO & Hélène FREON

The purpose of this paper is to understand how the current financial landscape shaped by the crises and new regulations impacts Investment Banking’s business model. We will focus on quantitative implications, i.e. valuation, modeling and pricing issues, as well as qualitative implications, i.e. best practices to manage quantitative aspects and handle these functions to the current Investment Banking organization.

We considered two pillars to shape our vision of collateral optimization:

1. Collateral as a refinancing instrument. Collateral is shifting from a mere hedging instrument for counterparty risk to a strategic refinancing instrument.

2. Improve asymmetric collateral quality and profitability. Recent requirements on collateralization highly impact collateral management through the increase in haircuts and funding of good-quality collateral. As a result, more and more banks are considering their net collateral balance as a KPI, i.e. monitoring their net collateral balance position and identifying the need in cash funding or transforming.


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