What is Collateral?

Collateral is an asset that is used as a pledge against a financial obligation, such as a loan or bond. Generally, collateral may be repossessed by the secured entity and sold if the underlying obligation is not paid.

When is Collateral required?

Collateral is used to mitigate risk. Some common types of risks include:

• Payment delays and default and liquidity risk
• Geographical and sectoral risk diversification.
• Money flows’ predictability
• The asset’s legality and regulatory framework
• Additional assurances that are associated with the collateral
• Cross-collateralization where a group of assets is used so that in the case of failure of one the rest can be used to cover that asset.