Collateral management is the operational and risk function through which financial firms secure their exposures to one another with cash and securities. It covers working out how much collateral is owed, issuing and answering calls, selecting and delivering assets, valuing what is held, and returning it when exposure falls. Banks, brokers, asset managers, insurers, pension funds and corporate treasuries all carry it out, either themselves or through an agent.
The function began as a back-office support for over-the-counter derivatives and has grown into a central part of how firms manage credit risk and liquidity. It applies wherever collateral is exchanged: derivatives, whether cleared or not, repurchase agreements, securities lending, and borrowing from central banks.
The daily process
For a bilateral derivatives relationship, a typical day runs as follows. Each party values the portfolio of trades covered by its bilateral collateral agreement and compares the exposure with the value of collateral already held, after applying the agreement's threshold and minimum transfer amount. If collateral is owed, the party in credit issues a margin call. The recipient checks the call against its own calculation and either agrees or raises a collateral dispute.
The provider then chooses what to deliver from the assets permitted under the rules on collateral eligibility, and instructs settlement. The receiver confirms receipt and books the position. Collateral held is revalued daily, as described under collateral valuation, and interest on cash collateral is accrued and settled periodically. Securities that are needed elsewhere or that become ineligible are swapped through collateral substitution, and income paid on securities held as collateral is passed back to the provider.
Two kinds of margin are managed. Variation margin reflects the current market value of the portfolio and moves in whichever direction that value has changed. Initial margin covers potential future losses and, for uncleared derivatives subject to regulation, must be exchanged by both sides and held in a way that protects it from the receiver's insolvency.
Operating models
Collateral can be administered in several ways. In the bilateral model, the two parties deal directly, using their own systems or a shared messaging platform to exchange calls. In the tri-party model, an agent, normally a large custodian or an international depository, sits between them and handles selection, valuation, substitution and settlement according to agreed schedules; see tri-party collateral management. For cleared trades, the clearing house sets the requirement and members collect from their clients. Some buy-side firms outsource the whole function to their custodian or to a specialist provider.
Segregation arrangements add a further dimension. Regulatory initial margin is usually held with a third-party custodian in an account pledged to the receiver, and clients of clearing members can choose between omnibus and individually segregated accounts. These choices are covered under collateral segregation.
Controls
Sound collateral management depends on agreement between the parties about what trades exist and what they are worth. Regular collateral reconciliation of positions and balances catches differences before they turn into disputes. Other controls include monitoring concentration in the collateral held, tracking unsettled deliveries, enforcing cut-off times, and escalating aged disputes. Legal agreements must be captured accurately in systems, since a wrong threshold or eligibility rule produces wrong calls every day.
Where the receiver has the right to reuse collateral, through title transfer or rehypothecation, the firm must track which assets have been passed on and be able to return equivalent assets on demand. Reuse lowers funding costs but creates chains of dependence between firms, and regulation limits it for client assets and prohibits it for regulatory initial margin.
Strategic role
Since the financial crisis of 2007 to 2009, regulation has greatly increased the amount of collateral in use. Mandatory clearing, margin rules for uncleared derivatives and liquidity requirements for banks all draw on the same pool of high-quality assets. Collateral has therefore become a scarce resource with a cost, managed alongside funding and liquidity.
Many firms have brought together collateral for derivatives, repo and securities lending into a single desk with a firm-wide view of assets and obligations. That view supports collateral optimisation, the allocation of assets so as to meet all requirements at the lowest cost. It also supports liquidity planning: margin calls are a contingent demand for cash and liquid securities, and firms model how large they could become under stress. Holding assets in several countries and depositories complicates the picture, a problem discussed under cross-border collateral.
Risks and current issues
The main operational risks are failed or late deliveries, valuation errors, and breakdowns in the many manual steps that remain, such as exchanging calls by email. Legal risk arises if the collateral arrangement is not enforceable in the provider's insolvency. Liquidity risk is the most prominent: sharp market moves produce large, simultaneous calls that must be met within a day, as seen in March 2020 and in the gilt market stress of 2022, when some funds had to sell assets to raise cash.
Industry and regulatory work has concentrated on standardising and automating margin processes, improving the preparedness of non-bank firms for margin calls, and shortening settlement times. Experiments with tokenised assets aim to let collateral move instantly and at any hour.