Mastering Collateral Management & Documentation
A Practical Guide for Negotiators
By Paul C. Harding & Christian A. Johnson
Financial Times / Pearson Education
December 2002
ISBN: 0-273-65924-3
607 Pages, 6 3/4" x 9 1/2"
$189.50 paper original
In response to the continuing and growing use of collateral by banks and other financial institutions, this is the first comprehensive book on the subject. This practical guide provides negotiators with a clear, concise explanation of the topic, from an operational perspective and with particular focus on the five ISDA Credit Support Documents.
Collateral is now big business. In January 2001 the International Swaps and Derivatives Association, Inc. (ISDA) calculated that between US$175-200 billion was pledged as collateral to protect credit exposure in the derivatives market. The authors estimate that 20-25% of interest rate and currency swap trades are now covered by collateral.
This book describes collateral documentation in jargon-free, concise terms making it the must have book for all junior and experienced negotiators in this field.
Contents
Chapter 1: Introduction History of Collateral in Europe and the USA. Application
of collateral to derivatives exposure. Early collateral management systems.
Need for standardised documentation. Documentation in the market today.
Chapter 2: Collateral Management from a European perspective How exposure
and collateral are monitored. Important matters for collateral managers to
know and establish:- - scope of derivatives products to be collateralised.
- types of eligible collateral. - frequency of marking to market and collateral
valuation. - Thresholds - Initial margin - Haircuts - Minimum Transfer Amounts
- Top-up collateral - Re-use of collateral - Excess collateral - Substitution
of collateral - Interest payable on cash collateral - Dispute procedures -
Reconciliation of collateral at regular intervals - What happens in a collateral
default - Management of interest and income payments on collateral - Co-ordination
of collateralisation through various branches and how to achieve a global
picture Screen examples to illustrate how a collateral call is made.
Chapter 3: Legal issues relating to collateral from the European and US perspective
Security interest and title transfer routes Recharacterisation Risk Enforceability
Diversity of laws in Europe affecting collateral perfection and enforceability
The draft EU Directive on Collateral The US legal perspective on collateral
The ISDA Collateral legal opinions Collateral held in central security depository
systems (e.g. Euroclear, Clearstream and BONY) and the rights of parties.
Chapter 4: Credit issues relating to collateral Permissible types of collateral
Haircut methodology Concentration risk Correlation risk Market risk Liquidity
risk Documentation risk
Chapter 5: The ISDA Credit Support Documents The English Law ISDA Credit Support
Annex The New York Law ISDA Credit Support Annex Differences between the New
York Credit Support Annex and the English Law Credit Support Annex The English
Law Credit Support Deed Summary treatment - The Japanese Law Credit Support
Annex Summary treatment - The ISDA 2001 Margin Provisions
Chapter 6: New developments Annexes
Author Paul Harding is Managing Director of Derivatives Documentation Ltd, a derivatives consultancy and project management company based in the City of London. Its clients include many of the world's leading banks. Christian Johnson is an associate professor based at Loyola University Chicago School of Law.
Reviews
"While this book is mainly focused on the documentation issues surrounding
Collateral Management it also provides a good overview of other aspects of
Collateral Management. ISDA provides a set of documents for cross border securitisation
that is neither self-explanatory nor easy to handle And this book will help
market participants at all different stages of the collateralisation process.
It provides guidance to both institutions, on how to formulate their own Collateral
Policy, and to negotiators concerned with the day to day negotiation of Collateral
Agreements. Paul Harding has done a great job." Wilfried F. Schütte,
Banksyndikus, Legal Services
"An excellent review of an important and complex area, analysing the critical
legal, operational and credit strands together in one volume. This will add
to the understanding of an increasingly vital area of risk management, where
the consequence of any failure is that a false sense of security may be the
only security you are left holding! A fine complementary volume to Mastering
the ISDA Master Agreement, explaining in detail not only the legal complexities
but also the important operational and credit considerations. Not only a 'practical
guide for negotiators' but also valuable for credit and operational risk professionals.
It includes a full review of not only the widely used ISDA collateral documents
but also the new 2001 Margin Provisions, which will help to spread better
understanding of this new untested document and may lead to greater acceptance
in the market." Keith Spiller, Executive Director, UBS Warburg
"Comprehensive yet practical, this timely volume offers lawyers, risk-managers
and documentation specialists the necessary insight into today's collateral
management practices. Additionally it offers those instutions that wish to
start-up their collateral program a well-structured overview of the issues
under consideration both from a European and US perspective." David
Suetens, Senior Vice President, Risk Management
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