In looking at the fundamentals of collateral management, we first of all need to look at what collateral is. What is the purpose for holding collateral? And what does the overall collateral management process look like? Collateral is assets that are pledged from one counterparty to another to mitigate the counterparty risk that one of those counterparties faces. If you are owed money from somebody, there is a worry, a concern that they may not pay that money back to you. You may require that they pledge collateral to you that you can take ownership of in the event of them not fulfilling their obligations to you to reduce your counterpart risk. So the purpose of holding collateral is to mitigate and to reduce credit risk in the event that the person who owes you money or has obligations to you defaults on those obligations. Collateral management is the process through which a bank can ensure that it is only taking on its desired level of credit exposure. It involves calculations of credit exposures. It involves identifying counterparties from whom there is documentation in place to demand collateral from. And finally involves making those collateral, or sometimes referred to as margin calls, demanding collateral be pledged from counterparties, and following up to ensure that collateral is delivered as requested. The kinds of transactions that are going to involve collateral firstly involve loans. Not all loans will involve collateral, but they can do. A good example of a collateralized loan is a mortgage where the homeowner promises to the lending bank that if they default on any mortgage payments, the bank can take ownership of their house. The house is the collateral. From an investment banking perspective, the kind of transactions that are more likely to involve collateral are derivatives and securities financing transactions. If we are trading derivatives on an OTC or over the counter basis then the requirement to pay collateral will be based on and determined by arrangements in place directly between the two counterparties to the trade. If we are trading derivatives over an exchange or listed derivatives then the clearing house will determine what those collateral requirements are. Within securities financing transactions, firstly, a repo or a sale and repurchase agreement where one of the counterparties to the trade is agreeing to sell assets today and then to repurchase them at a fixed price in the future is a collateralized loan through another form. The securities being traded form the collateral to this transaction. In a stock borrowing arrangement where one counterparty is borrowing stock potentially to facilitate a short selling position, the lender of those securities may be worried about the borrower returning the securities to them, and as a result may demand collateral so that if that stock is not returned to them, they have sufficient means to go out and repurchase the securities from themselves from the market. Margin lending transactions involve borrowing money to purchase securities. The typical scenario here will be that the securities purchased with the borrowed funds will form the collateral. The lender of the money will be worried that the borrower of funds is unable to repay the money they borrowed, but the lender will demand that the securities purchased with the borrowed funds are pledged as collateral so that if the counterpart does go bankrupt then the lender can take ownership of the securities purchased with their borrowed funds.