Creating an effective collateral management program through improved technology and business practices is important for mutual fund providers. The collateral management industry is in the midst of its most significant transformation ever as regulators engineer a derivatives market structure designed to mitigate systemic risk. The financial press is using worrying phrases like "collateral liquidity crunch" and "collateral scarcity," and introducing new terms like "collateral transformation", which are leaving mutual fund providers and other market participants anxious and confused. Business practices are changing as boards of directors, institutional investors and other stakeholders demand improved transparency, standardization and risk management.
Why does this matter for mutual fund providers now? Collateral management is evolving to address new regulation, such as the Dodd Frank Act. In early April, BBH expanded its collateral capabilities though a partnership with the Chicago Mercantile Exchange for the clearinghouse's IEF4 program, which allows participants to deposit corporate bonds as collateral for listed derivatives and cleared OTC swap contracts in a tri-party custody account with BBH. The support for corporate bonds as collateral is part of a larger effort to meet the increase in collateral required by the derivatives industry in light of new regulation, specifically the requirement to centrally clear swaps.