Collateral has been used for hundreds of years to provide security against the possibility of payment default by the opposing party in a trade.
However, collateral management has evolved rapidly in the last 15–20 years with increasing use of new technologies, competitive pressures in the institutional finance industry, and heightened counterparty risk from the wide use of derivatives, securitization of asset pools, and leverage.
As a result, collateral management is now a very complex process with interrelated functions involving multiple parties.
[2] Since 2014, large pensions and sovereign wealth funds, which typically hold high levels of high-quality securities, have been looking into opportunities such as collateral transformation to earn fees.
Collateral is legally watertight, valuable liquid property[4] that is pledged by the recipient as security on the value of the loan.
The main reason of taking collateral is credit risk reduction, especially during the time of the debt defaults, the currency crisis and the failure of major hedge funds.
The practice of putting up collateral in exchange for a loan has long been a part of the lending process between businesses.
With more institutions seeking credit, as well as the introduction of newer forms of technology, the scope of collateral management has grown.
In the world's major trading centres, counterparties predominantly use ISDA Credit Support Annex (CSA) standards to ensure clear and effective contracts exist before transactions begin.