Glossary · Operations
Collateral Management
Collateral management is the process of calculating, calling, posting, receiving and reconciling collateral that secures derivative, repo and financing exposures between a fund and its counterparties.
When a fund trades OTC derivatives under an ISDA with a Credit Support Annex (CSA), finances securities through repurchase agreements, or clears futures, it must exchange collateral as exposures move. Collateral management covers the daily exposure calculation, margin calls in both directions, eligibility checks against the CSA schedule, haircuts, thresholds and minimum transfer amounts, and settlement of cash or securities.
Two collateral types dominate: variation margin, which covers the current mark-to-market exposure, and initial margin, which covers potential future exposure. Uncleared margin rules now require many larger counterparties to exchange regulatory initial margin through segregated accounts.
For the books, collateral posted is a receivable (or a restricted asset if securities remain owned), collateral received is a payable, and interest on cash collateral must be accrued at the rate in the CSA. The main operational risks are disputes over valuations, missed calls that create uncollateralized exposure, and unreconciled collateral balances that distort cash forecasting. Disputes should be tracked in an aged log with an escalation path.
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