Buy-side looks to overcome cash collateral challenge

Panelists at The TRADE’s Future of Post Trade event explained asset managers are seeking alternatives to posting cash collateral.

Asset managers are looking at alternatives to posting cash collateral for their bilateral derivatives trades, panelists at The TRADE’s Future of Post Trade event explained.

Stricter capital rules for banks holding cash collateral on their balance sheet is forcing the buy-side to post non-cash collateral to avoid higher costs.

“Some sell-side have de-recognised cash off their balance sheet, so as an asset manager you can’t look across providers and see one collateral or pricing model,” said Matt Cullimore, sales, OpenGamma.

Cullimore added that asset managers are often being quoted different prices to post cash or non-cash collateral.

“This is why it’s never a ‘yes or no’, you will get different models and different pricing models if you give cash or non-cash. You want to bring transparency to market but there’s not the information for that,” he added.

One senior derivatives operations expert at BlackRock highlighted how his firm is looking into posting exchange traded funds (ETFs) as collateral.

He also said the balance for collateral has shifted from 90%-10% cash to non-cash, to 75%-25% cash to non-cash on its bilateral book.

Clearing houses are facing pressure to increase the types of collateral they accept. Frankfurt-based Eurex Clearing has recently expanded the range of securities to accept as collateral to include ETFs.

Phil Whitehurst, global head of service development at LCH, highlighted how the clearing house is looking to work with market participants to ease requirements on cash collateral.

“From a processing point of view, some [firms] find it easier to deliver one or the other [cash or non-cash]. We’re working towards more efficient delivery channels for non-cash initial margin so firms can keep cash for other essential purposes,” said Whitehurst.