When you think of a job in an investment bank, you probably don’t think of collateral management. You probably think of sales and trading, or M&A. You’re missing out! I spent five years working in collateral management and it’s a great place to begin your career.
Collateral management is now a vital function of any investment bank or asset management firm. Large institutions now concentrate as much on saving money as they do making it. And collateral is a good place for banks to start saving.
Collateral management is essentially moving financial products between two trading counterparties to cover the exposure of the underlying portfolio. If that made no sense, think about it in terms of a paying a mortgage on a house. If the borrower defaults on their payments, the mortgage provider will then have the right to seize the house. The house is the collateral, in other words.
In the same way, collateral serves to protect a financial institution in the event that their counterparties default. Collateral management has been an ever-growing industry since the Lehman collapse, where lots of lessons were learnt. When a financial institution requires extra collateral from a counterparty to cover exposure of the portfolio, they send them what is called a “margin call,” of which there were plenty around Lehman’s demise.
In my time in collateral management at Credit Suisse, I started out as an analyst liaising with the bank’s clients to agree portfolio exposures. Once agreed, collateral would then move between counterparties to cover the exposure. Any financial security could be used as collateral - so long as it complied with the ISDA agreement that details eligible collateral types.
I then moved to a much more responsible role in the newly formed “collateral optimisation” team, on the trading floor. Although I worked with traders, this wasn’t a client facing role. It was more about looking at how Credit Suisse’s collateral was being used and where it could be used in the most cost-efficient way.
For example, bilateral ISDA agreements (between just two trading counterparties) would typically involve collateral that could be held by either counterparty, depending on which way the exposure of the underlying portfolio went. When we received collateral from a counterparty because the exposure was in our favour, we would then look for opportunities to use it elsewhere. This is called “rehypothecation.” It’s a bit like recycling the collateral that comes in.
Cost efficiency in collateral terms means using collateral that can be sourced as cheaply as possible, whilst ensuring that it accrues the largest amount of interest or yield. There can be huge savings made from cutting unnecessary costs involved with collateral. It is very much a case of knowing and finding where the savings can be made, and executing them.
Collateral management is a good career for someone looking to progress in an area of utmost importance. Managing collateral efficiently requires thoroughness and diligence. You will get exposure to various different product types, since most ISDA agreements allow for numerous collateral products.
For me, collateral management was a great career move which eventually landed me in the front office. From here I then went on to the FX desk in a trade management role.
Chris Butcher now runs a business teaching people to make money trading the financial markets. Details of this can be found at www.thetradingclassroom.com
Photo credit: Igor Korionov, Getty