Colateral is a bilateral collateral management module that fosters credit risk mitigation for parties in trades in the financial market. It was developed in partnership with Clearstream, a company belonging to the business group of German stock exchange Deutsche Börse.
This system allows Government Bonds, DI instruments, bank CDs, financial bills, debentures and others to be offered as collateral in OTC, securities lending, leasing and other transactions. This financial collateral mechanism is used widely on the international market.
Colateral operates based a portfolio concept, without tying the exposure to the offered collaterals. In this way it optimizes collateral deposits, allowing risk management in different transactions contracted with a particular counterparty.
How it works
To begin with, the participating institutions – banks, funds and brokers, for example – report the amount of the exposure that must be covered by the collateral. This value can be in reference to several transactions.
The parties define the parameters that will be used to manage the assets deposited as collateral. The main criteria are:
- Limit above which the automatic collateral allocation process is triggered (threshold)
- Minimum transfer amount to the account of the pledgee, in the case of a need to cover exposure (Minimum transfer amount – MTA
- Application of a discount and maximum maturity on the security to be deposited as collateral
- Minimum to be pledged as collateral
The process requires the opening of accounts in the B3 environment, for collateral transfer. In the case of assets in B3 custody there is the opening of an Allocation Account, which receives assets eligible as collateral, and of a Collateral Account, which receives the assets of the counterparty.
Collateral is exclusively transferred by B3, regardless of the assets used. The system thus guarantees greater bilateral collateral security. When an exposure is reported, the eligible assets are automatically directed from the Allocation Account to the Collateral account of the pledgee.
- Credit risk mitigation by enabling the deposit of collateral that can be parameterized for each bilateral relationship
- Reduction of operational cost and risk with automated and well-defined processes executed by B3
- Optimization of the assets deposited as collateral, with the definition of parameters and assets eligible for the operation
- Real time access to all of the information related to collateral (allocation, de- allocation, substitution and valuation)
- Colateral generates a series of reports for the better management of collateral, with information about all of the transfers and the mark-to-market of assets authorized as collateral
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