Rationalizing the Collateral Schedule in Agent Lending: A Collateral Bucket Approach

In today’s rapidly evolving financial landscape, efficiency and risk mitigation are central in the Securities Lending environment. One area under increasing scrutiny is the collateral management framework used by Agent Lenders. Traditionally, collateral schedules—used to define eligible collateral types—have been highly granular, sometimes overly complex, and prone to operational inefficiencies due to the multiple collateral schedules agreed at a client-by-client basis. In response, a forward-thinking, Fairman Consulting has helped one the of the major Agent Lending provider streamlining this framework by developing “collateral bucket” system. This article explores how this innovative approach rationalized the collateral schedule, optimized risk management, and enhanced operational efficiency.

Background: The Challenge of Collateral Complexity

Agent Lenders, acting on behalf of beneficial owners, play a critical role in securities lending by ensuring appropriate collateralization of loaned securities. However, the traditional collateral schedules often include:

• Hundreds of ISIN-level entries or highly segmented asset classes

• Varied margin requirements (including haircuts) across differences in credit quality, rating or maturity

• Operational overhead in daily reconciliation and valuation.

• Counterparty negotiation friction due to lack of standardization.

This high level of complexity may lead to reduced scalability, operational friction (including no reallocation or substitution) longer onboarding times, and even missed opportunities for optimal collateral use. Recognizing these limitations, Fairman Consulting was engaged to assess and revamp the framework.

The Solution: Introducing Collateral Buckets

Fairman’s strategy was based on grouping collateral types into broader, risk-aligned categories by performing a client-by-client analysis (i.e.:  analyzing each collateral schedule into a database) to come up with collateral bucket with the smallest common denominator. Each bucket is defined by a set of characteristics that align with the lender’s risk appetite and regulatory requirements.

This step-by-step implementation was split into 5 parts:

1. Collateral Inventory Analysis

Historical data on collateral accepted over the past years was aggregated to analyze the Agent Lender collateral balance per triparty-agent, asset type and client.

Metrics such as liquidity, credit quality, concentration risk, and haircut performance were analyzed.

2. Risk-Based Segmentation

Collateral was grouped into 4–6 distinct buckets based on: asset class (e.g., government bonds, corporate bonds, equities, cash); credit rating band (e.g., AA and above, A-rated, BBB-rated); jurisdiction or issuer domicile; liquidity and market volatility.

3. Standardized Haircuts and Margins

Each bucket was assigned a standardized haircut that reflects the risk profile of the bucket replacing the individual, ISIN-level margin rules with simpler, scalable parameters.

4. Triparty-Agents Consultation

Fairman facilitated workshops with each triparty agent to align on the new framework and address any concerns regarding eligibility, tax, regulatory (e.g.: UCITS clients) and operational flexibility.

5. System Integration and Testing

The updated schedule was integrated into the Agent Lender collateral management system (front to back) following new algorithm solution to integrate buckets validated with system provider including specifications, new solution User Acceptance Testing (UAT) (leads by Fairman Consulting) and new solution sign-off for Go-LIVE in Production.

Benefits Realized:

The shift to a bucket-based collateral schedule yielded several tangible benefits:

⁠Operational Efficiency through a reduction in daily reconciliation time by up to 40% and onboarding facilitation of new borrowers and lenders in the standardized buckets. Scalability given the new instruments fitting existing bucket criteria could be accepted without needing individual schedule amendments. 

⁠Besides, this streamlining allows to improve risk control thanks to more consistent haircut application across similar risk assets while enhancing monitoring of concentration and eligibility breaches. Since then, a regulatory alignment with the new collateral buckets enhances collateral exposure reporting including reporting for Basel III, SFTR, and other capital adequacy frameworks due to more transparent categorization.

Finally, the main objective of the new collateral buckets was to ensure⁠ ⁠market competitiveness by offering a cleaner, more accessible schedule, the Agent Lender positioned itself as a more attractive counterparty in the lending market to not only align with its competitors but also be ahead thanks to the new buckets also aligned with the ESG requirements.

Lessons Learned:

While the project was a success, several key takeaways were noted:

Stakeholder engagement is crucial: early and continuous dialogue with internal Agent Lender teams, borrowers, lenders, custodians, triparty agents and risk teams helped build consensus and ensure the new solution was compatible with the Agent Lender pre-requisites.

Furthermore, data quality matter as high-integrity historical data and up-to-date collateral schedules were foundational to building accurate and effective buckets.

Having said that, flexibility must be preserved: Agent Lender balance was struck between simplification and retaining some room for custom collateral agreements with select clients for which the Agent Lender believes their collateral balance was big enough to have tailor-made collateral schedule.

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Conclusion:

The collateral bucket approach represents a modernization of collateral management within Agent Lending programs. By streamlining the schedule through risk-aligned categories, Fairman Consulting delivered a solution that was both operationally lean and strategically robust. As securities lending continues to evolve under the pressures of regulation and digitization, such rationalized frameworks will likely become industry best practices.