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What does a Collateral Manager do?

A Collateral Manager plays a pivotal role in finance, safeguarding assets pledged for loans to mitigate risk. They meticulously track and value collateral, ensuring it meets contractual obligations. Their expertise helps maintain financial stability and trust between parties. Want to understand how their strategic management can impact your investments? Continue with us to uncover the significance of their role in the financial landscape.
John Lister
John Lister

A collateral manager is an employee of a financial organization who is responsible for overseeing the collateralization process. This process is one whereby some form of loan or credit agreement is secured using an asset that will become the property of the creditor in the event that the borrower fails to repay the money. In many cases a collateral manager works for a third-party organization designed to assist both the creditor and the borrower.

One of the most common roles of a collateral manager is to negotiate a collateral management agreement. The agreement is a contract between the creditor, the borrower and the collateral management company. Because such deals have so many variables, such agreements are usually individually created rather than simply adapted from a template.

Man climbing a rope
Man climbing a rope

Another key role of the collateral manager position is to help the two sides agree on the financial details of the process. This involves two main elements. The first is to assess the statistical risk of the borrower not being able to repay the loan, and thus what is a fair and reasonable amount of collateral.

The second element is to assess a fair value for the particular asset the borrower puts up as security. Assigning a fair market value can be a complicated issue, as some forms of collateral, such as a financial asset, may vary in price over time. The collateral manager can help by independently assessing the likelihood that the creditor will find the collateral to be more or less valuable if and when it is forfeited compared to when the deal is made.

Collateral management also inherently involves extensive legal work, which may involve making sure both sides have their interests protected by the agreement. It can also include developing a system agreeable to both parties for resolving any disputes.

Where open credit investment positions are involved, such as when a company allows an investor to buy stocks using borrowed money, a collateral manager may deal with margin calls. The rules of such a transaction will usually state that an investor must make an additional payment if the stock price falls, because a price decrease increases the chance of the borrower incurring a loss upon selling the stock and thus being less likely to afford to repay the original loan. The amount of money an investor must pay will vary with the stock price, and some of the money will be repaid to the investor if the stock price rises. This money acts as a form of collateral as it will be forfeited if the investor fails to repay the loan.

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