Volatility has shifted from being a background risk to a structural driver in today’s derivatives markets. A key resulting trend is that firms are mobilizing a broader range of collateral assets than ever before, as continued market swings increase demand for flexibility, writes CloudMargin in a recent article.
Traditionally, cash and government securities formed the cornerstone of most collateral frameworks. However, in recent years, asset pools have expanded to include corporate bonds, equities and ETFs. Events such as the 2022 commodity crisis and the 2023 banking sector tremors exposed the limits of relying solely on cash and government securities. In response, clearing houses (CCPs) and bilateral agreements have broadened eligibility schedules, creating both opportunities and new layers of complexity.
As market participants and front offices work to boost liquidity through asset mobilization, risk departments are tightening controls to manage correlated exposure with increasingly complex eligibility and concentration rules.
Rising complexity in eligibility and concentration rules
The CloudMargin team reports seeing collateral eligibility schedules become progressively sophisticated. Examples include:
- Incorporation of clearing house averages and weighted average life measures
- Expansion into new asset classes such as equities, ETFs and Letters of Credit
- Detailed inclusion and exclusion criteria tied to asset-specific parameters
Concentration limits are also evolving. Conditional rules like “asset eligible if exposure > X” or “limit applies only if collateral balance > Y”, are appearing more frequently in Credit Support Annexes (CSAs).
Balancing liquidity and risk
When well-managed, this added complexity drives real benefits. A balanced combination of eligibility and concentration rules can:
- Expand usable assets and boost liquidity
- Support a “cheapest to deliver” approach for funding optimization
- Ensure diversification, reducing overexposure to any single asset or risk factor
Broader eligibility also strengthens resilience in stressed markets, enabling firms to post a broader range of assets. During the September 2022 UK mini-budget crisis, for example, firms with narrow eligibility schedules were constrained, while those with broader collateral acceptance were able to adapt more effectively.