SAP Collateral Management System (CMS): Configuration Guide & User Manual

By Arjan Hogenes

The purpose of this document is:
• to provide background on collateral management in general,
• to describe the functionality of SAP Collateral Management System
• to describe the required customizing SAP Collateral Management System
• to describe the main transactions in the SAP Collateral Management System.

• Language: English
• Publisher: BookBaby
• Release date: Jan 1, 2014
• ISBN: 9781483536798

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Endnotes

This publication contains references to the products of SAP AG. SAP, R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP BusinessObjects Explorer, StreamWork, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business Objects Software Ltd. Business Objects is an SAP company.

Sybase and Adaptive Server, iAnywhere, Sybase 365, SQL Anywhere, and other Sybase products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Sybase, Inc. Sybase is an SAP company. SAP AG is neither the author nor the publisher of this publication and is not responsible for its content. SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.

The purpose of this document is:

to provide background on collateral management in general (chapter 3,4,5),

to present collateral management software providers including SAP (chapter 4,5),

to describe the functionality of SAP Collateral Management System and

to describe the required customizing of SAP Collateral Management System in terms of:

organization structures in SAP system,

master data types,

main customizing settings,

authorization roles (chapter 6),

to describe the main transactions in the SAP Collateral Management System (chapter 7).

This chapter gives a description of a Collateral and Collateral Management.

Borrowing funds often requires the designation of collateral on the part of the recipient of the loan.¹

Collateral is legally watertight, valuable liquid property 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. But there are many other motivations why parties take collateral from each other:

Reduction of exposure in order to do more business with each other when credit limits are under pressure

Possibility to achieve regulatory capital savings by transferring or pledging eligible assets

Offer of keener pricing of credit risk

Improved access to market liquidity by collateralisation of interbank derivatives exposures

Access to more exotic businesses

Possibility of doing risky exotic trades

These motivations are interlinked, but the overwhelming driver for use of collateral is the desire to protect against credit risk. Many banks do not trade with counterparties without collateral agreements. This is typically the case with hedge funds.

There is a wide range of possible collaterals used to collateralise credit exposure with various degrees of risks. The following types of collaterals are used by parties involved:

Cash

Government securities (often direct obligations of G10 countries: Belgium, Canada, France, Germany, Great Britain, Italy, Japan, Netherlands, Sweden, Switzerland, the US)

Mortgage-backed securities (MBSs)

Corporate bonds/commercial papers

Letters of credit/guarantees

Equities

Government agency securities

Covered bonds

Real estate

Metals and commodities

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. Increased risks in the field of finance have inspired greater responsibility on the part of borrowers, and it is the aim of the collateral management to make sure the risks are as low as possible for the parties involved.

Collateral management is the method of granting, verifying, and giving advice on collateral transactions in order to reduce credit risk in unsecured financial transactions. The fundamental idea of collateral management is very simple, that is cash or securities are passed from one counterparty to another as security for a credit exposure. In a swap transaction between parties A and B, party A makes a mark-to-market (MtM) profit whilst party B makes a corresponding MtM loss. Party B then presents some form of collateral to party A to mitigate the credit exposure that arises due to positive MtM. The form of collateral is agreed before initiation of the contract. Collateral agreements are often bilateral. Collateral has to be returned or posted in the opposite direction when exposure decreases. In the case of a positive MtM, an institution calls for collateral and in the case of a negative MtM they have to post collateral.

Collateral management has many different functions. One of these functions is credit enhancement, in which a borrower is able to receive more affordable borrowing rates. Aspects of portfolio risk, risk management, capital adequacy, regulatory compliance and operational risk and asset-liability management are also included in many collateral management situations. A balance sheet technique is another commonly utilized facet of collateral management, which is used to maximize bank’s resources, ensure asset liability coverage rules are honoured, and seek out further capital from lending excess assets. Several sub-categories such as collateral arbitrage, collateral outsourcing, tri-party repurchase agreements, and credit risk assessment are just a few of the functions addressed in collateral management.

Collateral management involves multiple parties:

Collateral Management Team: Calculate collateral valuations, deliver and to receive collateral, maintain relevant data, handle margin calls, and to liaise with other parties in the collateral chain.

Credit Analysis Team: sets and approves collateral requirements for new and existing counterparties.

Front Office: establishes trading relationships and on-boards new accounts.

Middle Office

Legal Department

Valuation Department

Accounting & Finance

Third Party Service Providers

Once a new customer is identified by the Sales

Reviews for SAP Collateral Management System (CMS)

[Aatish Jain · Rating: 4 out of 5 stars]

Screenshots provided in the document were good way to understand the topic being discussed