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Collateral Management (E-Commerce)
  • Difficulty Level : Hard
  • Last Updated : 02 Mar, 2021
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In this, we will discuss an overview of Collateral Management(E-Commerce), responsibilities, risk management by collateral, and will also cover the Key Components of Collateral Management. Let’s discuss it one by one.

Collateral management : 
It is the method of verifying, and trustworthy for not any financial risk in future time. Collateral is the set of assets two parties exchanging assets in order to reduce credit risk associated with any unsecured financial transactions between them. The Collateral act as a protection for the lender. Collateral management is gaining importance as an effective risk mitigation technique in the areas of market risk management. The term Collateral refers to an asset that a lender accepts as a secured loan.

Responsibilities of Collateral management :  
The responsibility of the Collateral Management department is a large and small task. Daily actions include as follows.

  • Managing Collateral Movements –
    To record details of the collateral relationship in the collateral received or posted on the agreed mark-to-market, to call for margin as required, to transfer collateral to its counter-party once a valid call has been made, to check collateral to be received for the eligibility, to reuse collateral in accordance with policy guidelines, Custody, Clearing, and Settlement.
     
  • Margin Calls – 
    To notify, track, and resolve margin calls.
     
  • Substitutions – 
    To deal with requests for collateral substitutions both ways.
     
  • Processing –
    In this, you will see the payment-related activities, and also monitoring of transactions can also be monitored.
     
  • Valuations – 
    To evaluate all securities and cash positions held and posted as collateral, Valuations may be done on an end-of-day basis.

Risk Management by Collateral :
Collateral management is becoming important and essential of financial institution’s risk and regulatory compliance framework. Collateral management is reducing the risk of fraud or any financial deception. In capital markets, collateral is typically categorized under various financial instruments like cash, securities(government bonds), equities, commodities, mutual funds. 

Key Components of a Collateral Management :
The Collateral Management system (CMS) should be able to handle all the following activities.

  • Collateral agreement and documentation (collation)
  • Collateral allocation
  • Daily marks to market(MTM) and collateral calculations
  • Reconciliation (compromise)
  • Collateral optimization
  • Counter-party communications.

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