Collateral Management System

With the SAP announcement that the changeover to S/4 does not have to be carried out by the end of 2025 as originally planned, but will be possible by 2030, banks and credit institutions working with SAP have gained time. They can prepare more intensively for the coming changes. In this context, the need to switch to SAP CMS has also been pushed into the future for the time being.

The elimination of object and collateral management in SAP CML (Consumer and Mortgage Loans) in favor of collateral management in the CMS module was identified as the most important result of the S/4 Hana Readiness Check at banks and credit institutions that use CML for loan management.

It is therefore advisable to use the time gained to familiarize oneself with the functionalities offered and to actively take on the challenges of migrating CML objects and security.

What is behind the CMS module? Since the issuance of loans is associated with risks for banks, in many cases the provision of collateral is agreed with customers. This collateral must be managed appropriately, among other things to monitor its validity and to comply with regulatory requirements.

CMS is a stand-alone IT solution that meets these requirements. Based on the three entity types asset object, collateral agreement and receivable, the module enables comprehensive and at the same time structured collateral management.

The collateral agreement forms the core of the application. It acts as a link between the other two pillars by defining the encumbrances on the asset and the scope of collateralization in relation to the receivables.

Banks that have previously used CML for object and collateral management can map the associated asset objects in CMS in addition to the collateral agreements. The receivables are connected via CML by default. Alternatively, it is possible to connect external systems for the management of objects, receivables or business partners, so that there is a bank-specific scope for design.

Why change?

The module offers advantages over the current mapping of collateral in CML that banks and credit institutions can already take advantage of today. These include the bundled, process-oriented collateral management within one module, the detailed mapping and calculation of complex collateral constellations, and the options included for internal and external reporting.

These aspects contribute significantly to efficient and effective collateral management and are therefore of interest and relevance to banks and credit institutions regardless of the need to switch to CMS in the medium to long term.

In our opinion, an early changeover of collateral management is therefore worthwhile and also supports the further changeover to S/4. In contrast to the recording of collateral in CML, which takes place in direct connection with the creation of a loan, the collateral in CMS can already be created independently of an existing receivable and can therefore be better estimated from the outset.

The focus is on the collateral itself and not on the receivable to be secured. In line with the established process view in CMS, collateral can be processed in the module during its term and until it is released or, alternatively, liquidated.

To support collateral management, CMS provides users with a process configuration framework. Processes are mapped using business activities. These represent a significant control level.

For example, a status concept can be stored at activity level. Furthermore, it is possible to set which authorizations are available for certain user groups and which views should be permitted. The release processes are mapped via SAP workflows.

The module offers a comprehensive information base on the recorded entities through a large number of existing input fields in the workbench. In addition to purely informational fields, numerous data entries serve as the basis for the integrated and extensive calculation of collateral, which CMS always provides on the basis of the current information.

Collateral values, limits and spaces that contribute to the determination of the collateral value are provided, as well as information on its distribution among the linked receivables.

In addition, the remaining safety gap is shown. For an exact and equally comprehensible calculation of various collateral-relevant values, the use of detailed adjusting screws is necessary. This is particularly true if the collateral takes on complex constellations depending on the number of entities involved.

The set screws are attached to the interfaces between the collateral agreement and the asset as well as the goodwill. The recorded charges and collateral scopes can be assigned order criteria, including rank and sequence as well as priority and ranking class.

These criteria define an order among the entities, which in turn is applied in the formation and in the distribution of the collateral value within the calculation logic. In order to use the module effectively, it is helpful to go through the technical implementation of SAP for calculation once beforehand.

Internal and external reporting

Since collateral is not rigid, but agreements can expire, for example, CMS provides reports for monitoring collateral. Term monitoring to determine the validity of collateral is one of these reports that is available by default.

A further report relates to the review of the hedging gap. Changes to this, for example due to the ongoing repayment of a collateralized receivable, the revaluation of a tied asset or a change in the constellation of the entities, can be easily evaluated here.

In addition to these internal offerings for collateral monitoring, the module also provides support for meeting external reporting requirements. Relevant data can be extracted via the data extraction function, enabling reporting in line with requirements, for example in accordance with Basel II. As a result, fewer in-house developments are required for data collection.

The introduction of CMS requires precise planning, especially with regard to the required customizing and the migration concept for the data. In addition, it is advisable to plan sufficient time for the introduction of the module. Subsequent users should be able to familiarize themselves intensively with the functionalities and operation of CMS in order to fully exploit the potential of this solution.

By combining all collateral information in a compact but detailed way, including an integrated calculation function and reports tailored to requirements, the introduction of SAP CMS offers the opportunity to optimize the mapping and management of collateral.