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Table of Contents Page 1. Point of view 2 2. Why firms are concerned 4 3. Key issues opportunities 9 4. Industry environment 10 5. Likely regulatory response 11 6. Suggested approach 12 7. Case studies 13 8. Summary 15 9. Appendix 17 10. PwC contacts 24 Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * Date * PricewaterhouseCoopers Collateral Management ? Challenges Opportunities Current Challenges in Counterparty Collateral ManagementInformational Presentation for our ClientsApril 2008 PwC Point of view The recent turmoil in the credit markets has highlighted significant errors and shortfalls in CM operations. These errors have translated into material actual losses and sizable additional exposure which is under-reported to management, hence undermining the risk management benefits of collateral management. Significant operational challenges persist Although the role of collateral is straightforward, the volume, diversity and complexity of collateralized transactions have surpassed the scalability and flexibility of processes, people and technology that support the function. Credit and operational risks are significant Besides the direct impact of increased counterparty default exposure, underperforming CM functions may also cause or mask significant hidden risks such as portfolio concentration, flawed credit and customer data, and substandard or missing legal documentation – creating potentially dangerous latent exposures. The benefits of technology advances and the adoption of industry standards have been limited Bullish statements from Industry groups such as ISDA may over-state the degree to which derivatives-related CM operational issues have been reduced or eliminated by technology, e.g., the adoption of uniform confirmation and call practices. Our experience confirms that some large banks continue to experience high exception rates and difficulty processing collateral call