DLT: Balancing Operational Costs and Visibility In Collateral...

DLT: Balancing Operational Costs and Visibility In Collateral Management

By Capital Markets CIO Outlook | Thursday, June 06, 2019

FREMONT, CA: The perceived potential for the implementation of distributed ledger technology (DLT) has soared with the advent of several blockchain infrastructure suppliers. Collateral management is one of those domains where blockchain application tests have shown promising outcomes. Blockchain can implement a fundamentally distinct strategy to data management and validation in the area of collateral management with the ability to increase effectiveness, enhance regulatory control, and eliminate unnecessary intermediaries.

Blockchain is a catch-all phrase for DLT, a new type of database system that eliminates the need for loyal third parties to act as governance and enforcement agencies. Blockchain generates shared ledgers using cryptography and distributed messaging protocol and decentralizes the data management strategy. Blockchain enables organizations to establish near-real-time settlements and reinforce risk management through enhanced auditability and counterpart ties.

Collateral management is the technique of giving, verifying, and advising on collateral transactions aimed at decreasing credit risk in unsecured economic transactions to assist decrease credit risk in unsecured financial operations. Financial institutions have traditionally regarded collateral management as a reactive function, limited to processing collateral motions and negotiating associated legal contracts. Following the global financial crisis (GFC), there are stronger regulatory guidelines for appropriate risk coverage, strict criteria for stable financing of high-quality collaterals (HQCs) and late paradigm changes in the capital requirements standard in the derivatives marketplace. New technology-led innovations in the financial services sector have also improved collateral management operations ' understanding and significance.

Shortly, implementing blockchain in collateral management can assist stakeholders in decreasing operating expenses and boosting visibility on current collateral. Blockchain can strengthen trade and create trust in mitigating counterparty loan hazards by eliminating manual mistakes and related risks and decreasing the need for dispute management and reconciliation. It would also assist in reforming procedures of collateral management. Leaving traditional account structures organizations would be able to keep customer/asset separated accounts protected by extremely secured digital keys. Blockchain is progressively gaining traction in collateral management with the ability to offer integrated alternatives to legacy technical problems.

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