At a high level, collateral management is the function responsible for reducing credit risk in unsecured financial transactions. Collateral has been used for hundreds of years to provide security against the possibility of payment default by the opposing party (or parties) in a trade. In our modern banking industry collateral is used most prevalently as bilateral insurance over the counter (OTC) financial transactions
Collateral is typically required wholly or partially to secure derivatives transactions between institutional counterparties such as banks, broker-dealers, hedge funds, and lenders. Although collateral is also used in consumer and small business lending, for example, home loans, Export-Import related loans, business loans, car loans, etc.