LM-8 LM-8 Collateral management
LM-8.1 LM-8.1 Overview
LM-8.1.1
The ready availability of assets that banks can use as collateral to obtain funding by means of secured borrowing (e.g. repo) mitigates liquidity risk. Therefore, banks must allocate sufficient resources to ensure efficient and effective management of collateral in their liquidity risk management process.
August 2018LM-8.1.2
Collateral management must aim at optimising the allocation of collateral available for different operational needs, across products, business units, locations and currencies. It must be based on a prioritisation of needs and an awareness of the opportunity cost of its use, in both normal and stressed times.
August 2018LM-8.2 LM-8.2 Management of Collateral Positions
LM-8.2.1
Banks must have the ability to calculate all of their collateral positions, including assets currently deployed for use as collateral relative to amount of collateral required, and unencumbered assets available to be used as collateral.
August 2018LM-8.2.2
Bank's level of available collateral must be monitored by legal entity, jurisdiction and currency exposure. Banks must be able to track precisely the legal entity and the physical location (i.e. the custodian or securities settlement system) at which each of the assets is held, and monitor how such assets may be mobilised in a timely manner in case of need.
August 2018LM-8.2.3
Banks must have sufficient collateral to meet expected, and accommodate unexpected borrowing needs, as well as potential increases in margin requirements for pledged assets over different timeframes, including intraday, short-term and longer-term structural liquidity requirements, and have adequate systems for monitoring the shifts between intraday, overnight and term collateral usage. In determining the required collateral to be allocated for intraday liquidity needs, banks must consider the potential for significant uncertainty around the timing of payment flows during the day, as well as the potential for operational and liquidity disruptions that could necessitate the pledging or delivery of additional intraday collateral.
August 2018LM-8.2.4
Banks must assess the eligibility of each major asset class for pledging as collateral with relevant central banks (for intraday, overnight and term credit or secured borrowing under standing facilities, as the case may be), as well as the acceptability of assets to major counterparties and fund providers in secured funding markets. They must also ensure that there is proper legal documentation for each asset class to be effectively pledged for liquidity.
August 2018LM-8.2.5
Banks must diversify their sources of collateral to avoid excessive concentration on any particular funding provider or market, taking into consideration capacity constraints, sensitivity of prices, haircuts and collateral requirements under conditions of institution-specific and market-wide stress, and the availability of funds from private sector counterparties in various market stress scenarios.
August 2018LM-8.3 LM-8.3 Operational Issues
LM-8.3.1
Banks must address various operational issues relating to the use of collateral for obtaining liquidity. These include, but are not limited to:
a) Awareness of the operational and timing requirements associated with accessing the collateral given its physical location;b) Understanding the liquidity risks associated with different types of payment and settlement systems (e.g. 'net' systems versus 'gross' systems) and their implications for collateral management; andc) Taking into account the implications of obligations embedded in the contractual terms of certain transactions which, when triggered, may reduce the availability of collateral for liquidity risk management. These refer to, for example, margin requirements and triggering events that require a bank to: 1) provide additional collateral as a result of changes in the market valuation of the transactions or in the bank's credit rating or financial position (in the case of derivative transactions), or; 2) hypothecate or deliver additional assets to the pool of underlying assets when the embedded triggering events occur (in the case of securitisation transactions).August 2018LM-8.3.2
Banks must test on a regular basis, and at least annually, the ability to use its source of collateral in repo operations, to ensure its capability of using the securities to obtain the required liquidity, if needed, and assess the market appetite for a particular security, including the related haircut applied to put the operation in place. Banks must also ensure that there are no operational issues that could have an impact on the timing and the feasibility of the operation (e.g. limits to the transferability of the security, in case this is held in a local and foreign branch portfolio).
August 2018LM-8.3.3
For collateralised borrowing, banks must maintain all documentation related to the agreement with the counterparties.
August 2018
