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Collateral management in the new regulatory landscape

Global commodity trading has reached new peaks.  New markets are emerging in Asia, Latin America and Africa, as countries in these regions and others increase their exports of commodities. The growth in commodity trading is creating new opportunities for banks focused on commodity trade finance. However, with these opportunities come challenges, especially in the area of collateralized lending for which there are tougher regulations.

Under Basel III, banks involved in commodity trade finance must show that they have a legal stake in the commodity collateral they are financing, that the collateral is under their control, and that they have effective collateral monitoring practices in place.  In addition, Basel III has imposed new requirements that have significantly increased the complexity of commodity trade finance.

Although commodity trade finance is often a global business for banks, it is typically managed at the local level. As a result, banks lack good visibility into what they are financing overall. This isolated, location-based model also makes it difficult for banks to demonstrate their control over physical commodity collateral and to be aware of its real-time market value.

In the past, banks have managed collateral on a deal by deal basis using spreadsheets, despite the disadvantages.  Not only are spreadsheets manual and labor intensive, they also make it difficult to obtain a portfolio-wide view, as well as generate daily or intra-day market revaluations across the portfolio.

Banks need to be able to look across their entire portfolios to understand their risk exposure. In particular, they need to be able to aggregate data on all their deals in relation to each type of commodity they finance, as well as in relation to specific geographies, currencies, trade counterparties and other criteria, to ensure they are not over exposed.

With the increased focus on collateral monitoring, banks also need live market feeds that are applied automatically to each type of commodity collateral they are financing. In addition, they need live feeds from external third parties that have physical custody of the collateral to reconcile quantity and quality.

To deal with the new regulatory requirements governing collateralized lending, many banks recognize that they need to move away from using spreadsheets and invest in the latest collateral management technologies to manage, monitor and revalue underlying collateral.

The ideal collateral management solution should automatically capture and manage deal data, as well as details of the collateral being financed. It should offer automatic revaluation using market feeds and automatic reconciliation using collateral manager feeds.  In addition, it should provide powerful reporting capabilities, including the ability to assemble profiles and ratios in relation to the aggregated collateral being financed. Finally, the solution should capture and track all collateral management documentation.

In the current regulatory environment, banks need new tools to take collateral management to the next level. Spreadsheets will no longer suffice.  Leading banks are investing in new technologies to transform their collateral management processes to ensure regulatory compliance and drive their growth in the increasingly complex commodity trade finance business.


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