Initially, optimization started out as the ability to centralise the collateral function across business lines and assign a cost to collateral assets.
Collateral optimization technology systems could then give out the cheapest to deliver assets for each margin call across securities lending, repo, and OTC/exchange traded derivatives business lines.
However, collateral optimization has moved forward. Optimization is no longer just about pledging ‘cheapest to deliver’ collateral. It now also involves collateral allocation decisions across the portfolio, based on ‘hardest (collateral) to place’ and ‘hardest (counterparty) to please’.
This paper gives an overview of the latest techniques used to optimise collateral and discusses some of the limitations of collateral optimization. It also provides a list of questions financial firms should ask when implementing a collateral optimization project.
The full report is available here with free registration.