The International Swaps and Derivatives Association (ISDA) published a whitepaper by the team of its professional development program, Future Leaders in Derivatives (IFLD), about the policy and operational aspects of collateral management, and what market participants and infrastructure providers need to do to ensure the timely and efficient flow of collateral through the system.
It examines the growing challenges of collateral efficiency and liquidity resilience in the global derivatives market and addresses issues driven by regulatory complexity, market fragmentation and systemic vulnerabilities, while outlining practical strategies to address these issues, balancing the costs of collateral, risk management, regulatory compliance and technological innovation. The group’s recommendations include optimizing the use of collateral, expanding and diversifying the pool of eligible collateral and modernizing the infrastructure through technology.
“Recent market shocks and liquidity stresses have highlighted the need to explore new opportunities to bring greater efficiency, standardization and automation to collateral management. We set this talented group of derivatives market professionals the challenge of exploring the topic of collateral efficiency. This is an excellent paper in which the group has addressed the key policy, operational and technology issues that need to be overcome to streamline and automate the collateral ecosystem,” said Scott O’Malia, ISDA’s chief executive, in a statement.
“The topic of collateral and liquidity efficiency in the derivatives market has been particularly pertinent over the past few months, with increasing volatility in financial markets. By bringing together a broad range of expertise from around the world, the IFLD program has enabled us to harness a diversity of views to develop a paper that examines the growing challenges to collateral efficiency and liquidity resilience. The paper outlines actionable strategies to address the issues identified, and we hope it will provoke further discussion among market participants, policymakers and other stakeholders,” said IFLD participant Claire Warren, special counsel at King & Wood Mallesons in Sydney, in a statement.
“Collaborating with a cohort of industry professionals who shared extensive knowledge and expertise – from legal to trading and all points in between – has allowed us to develop a forward-thinking, detailed and actionable paper that we believe adds real value to the discussion on how to approach collateral in the era of crypto and generative artificial intelligence. With the access we were given to ISDA experts and best-in-class training, this paper combines diverse perspectives, technical expertise and wide-ranging experience. We hope it will encourage stakeholders to challenge legacy practices and unlock the potential for productivity gains, while also reducing operational risk and costs,” said IFLD participant Jakir Alam, program manager for New Product Development in Markets & Securities Services at HSBC, in a statement.