Focusing on collateral in 2025, it’s not just about the back office
30 September 2024
Neil Murphy, business manager at OSTTRA triResolve Margin, explores the myriad demands of technology, compliance and risk, as well as key focus areas for 2025
Image: stock.adobe.com/Farwa
While the use of collateral to secure loans and reduce risk has existed for centuries, the evolution of financial markets — combined with volatility and regulation — has seen collateral importance grow at considerable pace over the last decade. In the post-2008 landscape, the role of collateral managers has become increasingly critical in maintaining operational efficiency, ensuring regulatory compliance, and mitigating counterparty risk.
Correspondingly, the focus on the ‘what and how’ of collateral management has evolved, creating new demands from front office, risk, compliance and technology. Viewing collateral management through a back-office lens is very much a 20th century perspective.
Front office
Faced with meeting a need to post larger amounts of collateral — driven by Uncleared Margin Rules (UMR) and volatility — combined with increasing funding costs, 2025 will see front office teams looking to reduce the cost of posting collateral and improve overall capital efficiency. Collateral optimisation is therefore becoming a larger focus for those who manage collateral P&L. It is expected to become a more critical aspect of collateral management, with growing pressures on firms to use their assets more effectively.
How firms select collateral to meet margin calls varies from firm to firm, with many defaulting to deliver cash. While this removes any decision-making and is operationally simple, it comes with a funding cost.
Firms who have traditionally relied on cash are starting to consider whether non-cash assets (including government, agency and corporate bonds, as well as equities) would help to reduce cost. For those firms already holding non-cash inventories, this is an easier step, while for those without, it may mean exploring alternative funding sources, such as repo markets or intraday liquidity facilities to leverage these asset types.
While collateral optimisation can help firms to reduce funding costs, it can also be used to meet other objectives, including improved asset allocation and operational efficiency. As such, developing an optimisation approach should be a firm-wide decision. While ‘cheapest to deliver’ might be an obvious optimisation approach, it is no good if it comes with huge operational costs (managing hundreds of small collateral positions; dealing with substitutions and corporate actions; settlement costs, etc).
The combined interests of front office and collateral managers should ensure a focus on allocating the ‘right’ collateral, where ‘right’ may vary from one firm to another, and even from one day to the next. This means they should ensure they are using the most appropriate, cost-effective collateral, such as high-quality liquid assets (HQLA), while preserving their best assets for other business purposes.
An effective optimisation programme must dovetail with the operational collateral process, allowing real-time decisions about collateral allocation, while taking into consideration eligibility criteria, liquidity needs and cross-asset margin requirements (including bilateral OTC, cleared and repo).
Post-UMR, front office teams are also taking a proactive approach to assess the impact of new trades and looking to leverage pre-deal analytics to assess the collateral impact of new positions, therefore helping them to select an optimal counterparty and minimise collateral postings or remain under UMR thresholds.
Similarly, an increased focus on minimising the cost of capital required to meet margin requirements means front office are looking to portfolio optimisation tools that will allow them to net exposures across multiple counterparties, reducing the overall collateral burden. While both pre-deal checks and portfolio compression are priorities for the front office, they have a direct impact on collateral managers and may require new system interoperability, as well as being dependent on high levels of data quality.
Other areas of overlap between front office and collateral managers may be driven by counterparty preference, where end clients insist on specific credit support annex (CSA) terms, or use of industry-standard tools (including OSTTRA triResolve portfolio reconciliation or Acadia messaging) to sign a CSA. Ensuring these terms can be met — particularly where related to industry standards and technology — may require collaboration and prioritisation.
The UK liability-driven investment (LDI) crisis in September 2022 highlighted the importance of liquidity management. And while collateral managers themselves cannot do anything to improve liquidity, their role as client-facing and managing margin calls highlights the importance of transparency between them and the front office.
They will often be the first to understand the amount of funding that is required across counterparties, and increasingly front office teams are leaning on them for early insight and confirmation of calls. This highlights the importance to a collateral manager of being able to support early margin calls, leverage an automated workflow and gain real-time insight into margin disputes.
Risk and compliance
In recent years, one of the primary responsibilities of a collateral manager has been to ensure compliance with various regulatory frameworks, notably the European Market Infrastructure Regulation (EMIR) and UMR. Ensuring they do this correctly means greater collaboration with risk and compliance teams, as well as the front office, who are aware that a lack of compliance may impact or restrict their trading opportunities.
Since the rollout of UMR, collateral managers have had to adapt their practices to meet variation margin (VM) — and potentially — initial margin (IM) requirements. Whether your firm is ‘done’ with UMR largely depends on the size of your portfolio, your jurisdiction and the level of any existing IM exposure.
Most firms already in-scope should have fully integrated support for the regulations into their collateral management processes. For larger firms, IM has quickly become part of their BAU process, while for smaller firms not yet fully impacted, their focus now lies on ensuring they continue to avoid the full impact by remaining below threshold levels, or ensuring they are prepared once threshold levels are breached. This means:
• Threshold monitoring: constant monitoring of IM exposure to ensure that exposures remain within regulatory limits.
• Legal documentation preparation: negotiation of new regulatory compliant IM CSAs.
• Custodian onboarding: ensuring support for segregation requirements to hold IM collateral at a third-party custodian or triparty
Collateral managers must ensure that they comply with the regulatory requirements of each jurisdiction in which they operate. This includes adhering to local collateral eligibility rules, margin requirements, and reporting standards. The introduction of margin rules in new jurisdictions over 2024-25 will ensure collateral managers remain busy.
Basel III Endgame’s capital adequacy regulations, particularly those governing the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), continue to influence firms’ thoughts about collateral at a higher level. The impact being a focus on optimising collateral portfolios to meet these requirements, ensuring they minimise the impact on liquidity and operational costs.
An increased regulatory focus on stress testing may mean firms will be required to consider liquidity stress tests that model various market scenarios and allow them to anticipate potential liquidity shortfalls while ensuring they can meet margin calls during periods of volatility.
Technology
The role of technology in collateral management has expanded significantly in recent years. Automation and digitisation are now transforming how collateral is managed for many firms, with a focus on reducing operational risk, improving efficiency, and increasing transparency. However, for those firms that find themselves behind in the race to update their systems and move to industry standards, 2025 may be a year for catch-up.
Automation has become a cornerstone of collateral management. By automating routine processes such as margin calls, settlements, and reconciliations, collateral managers have largely been able to reduce the risk of human error, lower operational costs, and improve efficiency — while similarly allowing business growth and scalability. If not already done, adoption of these standards should be a priority for collateral managers, allowing them to move away from high-touch manual processing and move towards real-time capabilities.
Adoption of industry standards and new technology — particularly in terms of collateral workflow — are essential building blocks. The emergence of new technologies such as blockchain and distributed ledger technology (DLT) are already creating noise in the collateral world, and firms will struggle to adopt these next-gen capabilities if they are already behind from a technology perspective. Their use case is becoming clearer, with these technologies expected to enhance the transparency and security of collateral movements, allowing improved automation, while ensuring real-time collateral transfers.
Effective November 2025, new ISO 20022 requirements will necessitate that collateral managers upgrade their SWIFT capabilities to meet new standards for payment instructions, ensuring collaboration with technology teams should have likely begun already.
Largely thanks to ChatGPT, 2023 was the year AI entered the mainstream. With this increased acceptance, more and more firms are looking to adopt AI and machine learning strategies as a means of reducing cost and increasing capacity. For the collateral manager, use cases include margin workflow and collateral optimisation, while the data analytics capabilities of AI will provide insights into collateral usage, market trends, and counterparty behaviour.
Conclusion
The role of a collateral manager in 2025 is likely to be more challenging and technology-driven than ever before. Collateral managers will need to ensure they are ready to support the growing focus of their colleagues in front office, risk, and technology, ensuring their firms can meet compliance requirements and optimise collateral positions, while supporting a wider focus on liquidity management and risk mitigation.
To do so, they will need to continue evolving their collateral technology, ensuring the integration of new industry-standard tools, and adoption of new technologies to stay competitive in a rapidly evolving market. By focusing on these key areas, collateral managers can help to navigate ongoing volatility while driving efficiency, reducing costs, and managing risk effectively.
Correspondingly, the focus on the ‘what and how’ of collateral management has evolved, creating new demands from front office, risk, compliance and technology. Viewing collateral management through a back-office lens is very much a 20th century perspective.
Front office
Faced with meeting a need to post larger amounts of collateral — driven by Uncleared Margin Rules (UMR) and volatility — combined with increasing funding costs, 2025 will see front office teams looking to reduce the cost of posting collateral and improve overall capital efficiency. Collateral optimisation is therefore becoming a larger focus for those who manage collateral P&L. It is expected to become a more critical aspect of collateral management, with growing pressures on firms to use their assets more effectively.
How firms select collateral to meet margin calls varies from firm to firm, with many defaulting to deliver cash. While this removes any decision-making and is operationally simple, it comes with a funding cost.
Firms who have traditionally relied on cash are starting to consider whether non-cash assets (including government, agency and corporate bonds, as well as equities) would help to reduce cost. For those firms already holding non-cash inventories, this is an easier step, while for those without, it may mean exploring alternative funding sources, such as repo markets or intraday liquidity facilities to leverage these asset types.
While collateral optimisation can help firms to reduce funding costs, it can also be used to meet other objectives, including improved asset allocation and operational efficiency. As such, developing an optimisation approach should be a firm-wide decision. While ‘cheapest to deliver’ might be an obvious optimisation approach, it is no good if it comes with huge operational costs (managing hundreds of small collateral positions; dealing with substitutions and corporate actions; settlement costs, etc).
The combined interests of front office and collateral managers should ensure a focus on allocating the ‘right’ collateral, where ‘right’ may vary from one firm to another, and even from one day to the next. This means they should ensure they are using the most appropriate, cost-effective collateral, such as high-quality liquid assets (HQLA), while preserving their best assets for other business purposes.
An effective optimisation programme must dovetail with the operational collateral process, allowing real-time decisions about collateral allocation, while taking into consideration eligibility criteria, liquidity needs and cross-asset margin requirements (including bilateral OTC, cleared and repo).
Post-UMR, front office teams are also taking a proactive approach to assess the impact of new trades and looking to leverage pre-deal analytics to assess the collateral impact of new positions, therefore helping them to select an optimal counterparty and minimise collateral postings or remain under UMR thresholds.
Similarly, an increased focus on minimising the cost of capital required to meet margin requirements means front office are looking to portfolio optimisation tools that will allow them to net exposures across multiple counterparties, reducing the overall collateral burden. While both pre-deal checks and portfolio compression are priorities for the front office, they have a direct impact on collateral managers and may require new system interoperability, as well as being dependent on high levels of data quality.
Other areas of overlap between front office and collateral managers may be driven by counterparty preference, where end clients insist on specific credit support annex (CSA) terms, or use of industry-standard tools (including OSTTRA triResolve portfolio reconciliation or Acadia messaging) to sign a CSA. Ensuring these terms can be met — particularly where related to industry standards and technology — may require collaboration and prioritisation.
The UK liability-driven investment (LDI) crisis in September 2022 highlighted the importance of liquidity management. And while collateral managers themselves cannot do anything to improve liquidity, their role as client-facing and managing margin calls highlights the importance of transparency between them and the front office.
They will often be the first to understand the amount of funding that is required across counterparties, and increasingly front office teams are leaning on them for early insight and confirmation of calls. This highlights the importance to a collateral manager of being able to support early margin calls, leverage an automated workflow and gain real-time insight into margin disputes.
Risk and compliance
In recent years, one of the primary responsibilities of a collateral manager has been to ensure compliance with various regulatory frameworks, notably the European Market Infrastructure Regulation (EMIR) and UMR. Ensuring they do this correctly means greater collaboration with risk and compliance teams, as well as the front office, who are aware that a lack of compliance may impact or restrict their trading opportunities.
Since the rollout of UMR, collateral managers have had to adapt their practices to meet variation margin (VM) — and potentially — initial margin (IM) requirements. Whether your firm is ‘done’ with UMR largely depends on the size of your portfolio, your jurisdiction and the level of any existing IM exposure.
Most firms already in-scope should have fully integrated support for the regulations into their collateral management processes. For larger firms, IM has quickly become part of their BAU process, while for smaller firms not yet fully impacted, their focus now lies on ensuring they continue to avoid the full impact by remaining below threshold levels, or ensuring they are prepared once threshold levels are breached. This means:
• Threshold monitoring: constant monitoring of IM exposure to ensure that exposures remain within regulatory limits.
• Legal documentation preparation: negotiation of new regulatory compliant IM CSAs.
• Custodian onboarding: ensuring support for segregation requirements to hold IM collateral at a third-party custodian or triparty
Collateral managers must ensure that they comply with the regulatory requirements of each jurisdiction in which they operate. This includes adhering to local collateral eligibility rules, margin requirements, and reporting standards. The introduction of margin rules in new jurisdictions over 2024-25 will ensure collateral managers remain busy.
Basel III Endgame’s capital adequacy regulations, particularly those governing the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), continue to influence firms’ thoughts about collateral at a higher level. The impact being a focus on optimising collateral portfolios to meet these requirements, ensuring they minimise the impact on liquidity and operational costs.
An increased regulatory focus on stress testing may mean firms will be required to consider liquidity stress tests that model various market scenarios and allow them to anticipate potential liquidity shortfalls while ensuring they can meet margin calls during periods of volatility.
Technology
The role of technology in collateral management has expanded significantly in recent years. Automation and digitisation are now transforming how collateral is managed for many firms, with a focus on reducing operational risk, improving efficiency, and increasing transparency. However, for those firms that find themselves behind in the race to update their systems and move to industry standards, 2025 may be a year for catch-up.
Automation has become a cornerstone of collateral management. By automating routine processes such as margin calls, settlements, and reconciliations, collateral managers have largely been able to reduce the risk of human error, lower operational costs, and improve efficiency — while similarly allowing business growth and scalability. If not already done, adoption of these standards should be a priority for collateral managers, allowing them to move away from high-touch manual processing and move towards real-time capabilities.
Adoption of industry standards and new technology — particularly in terms of collateral workflow — are essential building blocks. The emergence of new technologies such as blockchain and distributed ledger technology (DLT) are already creating noise in the collateral world, and firms will struggle to adopt these next-gen capabilities if they are already behind from a technology perspective. Their use case is becoming clearer, with these technologies expected to enhance the transparency and security of collateral movements, allowing improved automation, while ensuring real-time collateral transfers.
Effective November 2025, new ISO 20022 requirements will necessitate that collateral managers upgrade their SWIFT capabilities to meet new standards for payment instructions, ensuring collaboration with technology teams should have likely begun already.
Largely thanks to ChatGPT, 2023 was the year AI entered the mainstream. With this increased acceptance, more and more firms are looking to adopt AI and machine learning strategies as a means of reducing cost and increasing capacity. For the collateral manager, use cases include margin workflow and collateral optimisation, while the data analytics capabilities of AI will provide insights into collateral usage, market trends, and counterparty behaviour.
Conclusion
The role of a collateral manager in 2025 is likely to be more challenging and technology-driven than ever before. Collateral managers will need to ensure they are ready to support the growing focus of their colleagues in front office, risk, and technology, ensuring their firms can meet compliance requirements and optimise collateral positions, while supporting a wider focus on liquidity management and risk mitigation.
To do so, they will need to continue evolving their collateral technology, ensuring the integration of new industry-standard tools, and adoption of new technologies to stay competitive in a rapidly evolving market. By focusing on these key areas, collateral managers can help to navigate ongoing volatility while driving efficiency, reducing costs, and managing risk effectively.
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