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Digital Subscriptions > The Hedge Fund Journal > Issue 108 - October 2015 > The New Collateral Environment

The New Collateral Environment

How regulation has moved collateralization to front office

Until 2007, the process of collateral allocation was just that: a process. Before the crisis, derivatives traders – predominately banks and large asset managers – would post collateral to each other, protecting against the prospect of default. Back then, it was a relatively simple, operational concern – choose some collateral, post it to the deal, move on to the next one. But today it is much more than that. It is strategic, with significant consequences for return on equity – and therefore profitability.

The good old days

Before the crisis, a deal that needed collateral would generally see collateralized cash posted to it. Cash was cheap, it was simple to get your hands on; it could be borrowed easily. Many banks could fund a large percentage of their balance sheet overnight. This meant those working the deal could focus on the investment itself, and didn’t worry too much about where the collateral was coming from – or what form it was taking. However, the crisis’ regulatory fallout changed all that.

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About The Hedge Fund Journal

INFORMING THE HEDGE FUND COMMUNITY With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry. Highlights of Issue 108: BlueCrest - Equity strategy excels in 2015 Volatility & Uncertainty to Define 2016 - Major challenges facing market participants On Origins of Alpha - Is the stock market a quasi Ponzi scheme? InfraHedge - The largest MAP-infrastructure provider
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