Financial institutions around the world need to get their collateral management processes ready for the challenges ahead. The goal is to establish robust collateral management. But what is robust collateral management - and how can institutions get there? Find out even more in our associated whitepaper, available for free on our website: http://foxeye.me/p6c3j We are also hosting a series of associated webinars to introduce this topic in an interactive session. You may register for free on our website: http://foxeye.me/ttuye

1. 1
management
What is robust collateral
management? Why is it important?
How can it be achieved?
Robust collateral

2. Agenda
1
Why today's CM processes are not
ready for the challenges ahead
3 What are the alternatives to achieving robust collateral management?
4 What is the best approach for coming to a decision?
2 What is robust collateral management?

3. 3
Global OTC derivatives reform impacts collateral
management
■ Margin levels increase
dramatically through initial
margin requirements
■ Margin call volumes increase to
at least daily per clearing broker
or even intraday at clearing
houses
■ High pressure on liquidity
management
■ High pressure on operational
efficiency

4. 4
Bilateral collateralization will become mandatory
■ Global draft standard from BCBS &
IOSCO
■ Mandatory exchange of collateral for
non-centrally cleared deals
■ Variation and initial margins
■ QIS expects initial margin
requirements of EUR 700bn

5. 5
Shortage of collateral supply ahead
 Collateral crunch
■ Increasing Basel III capital
requirements will tie eligible
collateral
■ Re-hypothecation constraints limit
flow of collateral
■ Sovereign debt crisis decreases
overall volume and value of
collateral assets
■ Increased demand meets shortage
of supply  Collateral crunch

6. 6
Existing collateral management processes typically
show a variety of inefficiencies
■ Cash-only, highly fragmented and
manual collateral management
processes
■ No enterprise wide inventory of
assets and agreements
■ Proprietary MS Excel frameworks
instead of enterprise collateral
management systems
■ No possibility for what-if scenarios
and forecasting
■ Inconsistent and out-dated
derivatives pricing capabilities

7. 7
Checklist for assessing an institutions readiness for
the challenges ahead
1
Are my processes and systems ready to handle collateral management of the
cleared OTC derivatives business?
2
Do my processes and systems support posting of securities as collateral?
3
Do I have an overview of the entire inventory of eligible assets to be posted as
collateral across all business units and entities?
4
Is collateral management driven by the front office?
5
Do I have collateral optimization strategies in place?
6
Can I forecast collateral demand and consider this within my liquidity plan?
7
Are the processes almost automated and supported by a technology?
Yes No
Yes No
Yes No
Yes No
Yes No
Yes No
Yes No

8. Agenda
1 Why today's CM processes are not ready for the challenges ahead
3 What are the alternatives to achieving robust collateral management?
4 What is the best approach for coming to a decision?
2 What is robust collateral management?

9. 9
Robust collateral management enables a 360° view
■ Know all collateral assets available
across all business lines
■ Match collateral available against
current and projected cashflows out
of every collateralized transaction
■ Consider collateral that has already
been pledged / transferred
■ Based on the 360° view – support all
processes around collateral
management

10. 10
Robust collateral management has to cover many
different aspects
■ Collateral management
consists out of many
different use cases –
requiring lots of different
features and functions
■ The next slides will focus a
subset of very important
aspects of robust collateral
management and the
challenges associated with
them
Collateral Management
Inventory
Trans‐
forma on
Margin
calcula on
Op mi‐
za on
Disputes Fore‐
cas ng
Collateral management
Tracking
Valua on

11. 11
Enterprise-wide collateral asset inventory
■ Eligibility of collateral assets varies
strongly by counterparty and type of
contract
■ In general a huge variety of assets can
be used as collateral
■ Typically assets are not managed
in a common pool – instead they
are spread across silos and systems
■ Establishing a central asset inventory is
a key challenge – requiring robust data
interfaces

12. 12
Collateral agreements inventory
■ Collateral agreements involve lots of paperwork
with hundreds of terms & conditions
■ Could also be seen as complex derivative with
underlying basket of derivatives and exotic
options
■ Rarely represented in systems in a structured
way
■ Robust CM requires systems capable of
capturing agreements with all complexity in a
structured way
■ Additional challenges are quality assurance
and keeping them up-to-date

13. 13
Collateral tracking
■ Challenge to know exactly
which asset has been given or
received as collateral for which
collateral agreement at any
given point in time
■ Collateral transactions may not
be settled yet
■ Robust collateral management
needs to be able to look
through the whole settlement
process

14. 14
Collateral optimization strategies
■ Collateral optimization involves a broad
range of measures aimed at minimizing
costs
■ Consider exchange traded derivatives
over OTC derivatives for certain use-
cases
■ Seek increased margin efficiency
through cross margining
■ Utilize re-hypothecation of collateral
received
■ Deliver cheapest collateral possible

15. 15
Cheapest to deliver optimization
■ Utilize algorithms to propose
collateral movements that
result in the cheapest-to-
deliver collateral
■ Requires a very granular
price-tag for each collateral
asset
■ Should also consider
additional preferences
through flexible rules engines
OptimizationAlgorithm
Cheapest
to deliver
collateral
movement
proposal
Eligibility
criteria
Asset
inventory
Funding
price tags
Current
allocation
Margin calls
Contract
inventory
Market data

16. 16
Valuation
■ Precise and quality assured market
data and well calibrated pricing
models
■ For pricing of collateral assets as well
as underlying collateralized derivative
contracts
■ To validate incoming and generate
outgoing margin calls
■ What-if simulations for robust
liquidity management
■ Challenges in initial margin calculation
and OIS discounting

17. 17
Real-time front office support
■ Robust collateral management is
not a pure back office function
■ Front office must understand
current collateral situation and
collateral implications of any front
office activity
■ Pre-deal analysis is a must to
consider implications in pricing and
decision making
■ Can also assist in finding the least
expensive settlement location

18. 18
Flexible workflow support
■ Challenging and frequently changing
environment
■ A robust collateral management solution
must be flexible enough to support new
workflow requirements
■ E.g. processing bilateral collateral agreements
is very different from processing margin calls
from a clearing broker or CCP
■ Currently no common standards – but
expected to be established over time
■ A flexible solution allows to adapt to changes at
low implementation costs

19. Agenda
1 Why today's CM processes are not ready for the challenges ahead
3
What are the alternatives to achieving
robust collateral management?
4 What is the best approach for coming to a decision?
2 What is robust collateral management?

20. 20
In general there are two approaches:
In-house vs. outsourced
■ Challenge one lies in comparing pros and cons of each approach
and align them with the institutions specific requirements
■ Challenge two lies in comparing the actual system and service
providers

21. 21
Challenges of an in-house approach
■ Requires decent investment into
technology and resources
■ Operational expertise is essential –
knowledge gaps need to be closed by
either recruiting experts or through
training
■ Selection and implementation of the
right technology is a complex project
■ Result is independence, flexibility and if
done right a competitive advantage

22. 22
Challenges of an outsourced approach
■ Outsourcing to a 3rd party is possible
even though the function is mission
critical
■ Attractive where resources and budgets
are tight
■ Quicker time to market is possible –
although there are still lots of
integration issues to be solved
■ Challenge to find a trustworthy partner
■ No competitive advantage

23. Agenda
1 Why today's CM processes are not ready for the challenges ahead
3 What are the alternatives to achieving robust collateral management?
4
What is the best approach for
coming to a decision?
2 What is robust collateral management?

24. 24
First you have to know your requirements
■ Requirements for a robust
collateral management need to be
aligned with the institution's future
business model
■ Requirements are the basis for
composing a questionnaire for
system and/or service providers
■ Follow a proper requirements
gathering process and ensure
stakeholder commitment

25. 25
Compare solutions and services through a
professional evaluation process
■ Thorough preparation and planning phase
■ Professional RFI (request for information) phase with a long list of
vendors
■ Intensive phase of demos and workshops with a mid list of
vendors
■ Solid business case development with cost / benefit analysis and
formal RFP (request for proposal) process with a short list of
vendors
■ Presentation of the results and final decision making

26. 26
FAST TRACK – Design a plan of action within just 4
days
■ FAST TRACK for robust collateral
management is FOXEYE's unique
approach
■ Asses the status-quo, identify gaps and
design a plan of action within just 4
days
■ Find further information and a
detailed brochure on our website
http://www.foxeye.net
■ Get in touch with us for an initial
consultation

27. 27
Download our whitepaper and
register for our webinar
■ Find out more about robust collateral
management in our free whitepaper:
http://foxeye.me/p6c3j
■ Get in touch with our experts by
attending the associated webinar:
http://foxeye.me/ttuye

28. 28
We would like to invite you to engage with our experts via online
business networks
■ Join the online group FOXNET – The Community for Front Office
Xperts on LinkedIn or Xing to collaborate with us on hot topics
and our publications
■ Or simply visit or follow our website at www.FOXEYE.net
Thank you!

29. 29
Phone: +41 (0)41 - 66 299 10
Fax: +41 (0)41 - 66 299 11
Mail: office@foxeye.net
Web: www.foxeye.net
AG
FOXEYE AG - The Frontoffice Xperts
Morgental 26
CH-8126 Zurich
Switzerland
GERMANY
Bockenheimer Landstraße 17/19
D-60325 Frankfurt/Main
Germany
AUSTRIA
Bismarckstr. 9
A-4020 Linz
Austria
SPAIN
Calle Las Lonjas 4
E-38400 Puerto de la Cruz
Spain
USA
100 Manhattan Avenue
Suite 1013
Union City
New Jersey
SINGAPORE
80 Raffles Place
#16-20 UOB Plaza 2
Singapore 048624