The changing shape of variation margin collateral

Cash has long dominated variation margin (VM) for uncleared derivatives, but that dominance is being tested. Rising funding costs, regulatory pressures and repeated episodes of market stress are prompting financial firms to reconsider how VM is posted — and whether a wider range of securities can play a bigger role.

Drawing on a global survey of 114 collateral management specialists, this Risk.net report examines how attitudes to non-cash VM are evolving across the sell side and buy side, where ambitions diverge, and why operational complexity continues to slow progress. It also explores the growing interest in tri-party infrastructure as a potential enabler of scale, efficiency and control in VM collateral management.

Key findings include:

• 58% of sell-side firms and 32% of buy-side firms say they have steadily increased their use of non-cash VM.
• Government bonds, investment-grade corporates and supranationals are the most popular forms of non-cash collateral used by both sets of respondents.
• Settlement fails and valuation discrepancies are the main challenges encountered when using non-cash collateral
• Rising non-cash usage is boosting interest in tri-party services, with around one-quarter of firms already using tri-party for both IM and VM

The report includes comment from a range of practitioners and is essential reading for heads of collateral management, margining and treasury, as well as risk and post-trade leaders across buy-side and sell-side firms.

Download the report to understand what is shaping the future of VM collateral.