As funding costs escalate, managing and mitigating collateral expenses has become a strategic imperative requiring firms to evaluate their activity across all derivative types and counterparties.
There are the findings of a recent Coalition Crisil Greenwich report – Fixed-income cross-margin opportunities: A driver of change -(https://www.greenwich.com/market-structure-technology/fixed-income-cross-margin-opportunities-driver-change) which canvassed 38 senior derivatives market participants in the US. The aim was to identify key trends in margin and collateral including costs, savings and regulation.
Looking at the cost of trading, liquidity ranked as having the highest impact for both futures and swaps, but differences emerged when analysing margin. Initial margin was number one for swap traders, but the margin period of risk (MPOR) was top of the list for uncleared swaps, lower for cleared swaps and at the bottom for futures.
MPOR is the time between the last exchange of collateral and when a defaulted counterparty’s positions are closed out and replaced. This period is critical because it’s the window during which market risk can cause the value of collateral to become insufficient to cover the loss from the defaulting party’s positions.
Some expenses though were easier to reduce than others. For example, liquidity the study noted liquidity costs could be managed to some extent via ongoing transaction cost analysis (TCA), but the ability to lower margin costs was greatest when trading instruments with offsetting risks. This assumed that the instruments are cleared and can be cross margined in an efficient way.
“It is certainly a balancing act, said Stephen Bruel, Senior Analyst on the Market Structure & Technology team and author of the report. “Offsets are not the sole reason to clear through a particular CCP, but our research indicates that it is becoming an increasingly important consideration.”
The report notes that collateral desks employ different strategies for helping manage margin costs. For some, that may mean using a collateral optimisation algorithm when selecting collateral. This approach does not affect the amount of collateral owed. Instead, it determines which collateral is cheapest to deliver to a particular counterparty.
For instance, selecting cash or a particular US Treasury bond based on the fund’s current holdings, interest rates and other factors will help mitigate some—but by no means all—collateral costs, one can look to find offsetting positions and cross-margin those positions against each other.
A more popular way – by 94% of respondents is to offset the margin requirements for different but related financial products, such as USD interest rate swaps and futures. This can result in significant savings on initial margin, which has been labelled as expensive. In addition, minimising the amount of collateral needed to cover risk means cross-margining can be used for other purposes, such as generating alpha or funding other activities.
However, the study notes that for cross margining to work, instruments need to be cleared with the same futures clearing merchant (FCM), either at the same CCP or at separate CCPs with a cross-margining arrangement.
Respondents also do not seem wedded to a particular CCP with 93% willing to change if the margin offsets are greater than the CCP basis. This refers to the price differential between identical swaps contracts cleared at various CCPs.
This basis can be impacted by differing collateral costs, positioning, and netting opportunities between them. A particular focus is pricing differences between USD interest-rate swap contracts cleared at LCH compared to CME Group.
For some, the report notes the size and volatility with this basis drove participants to clear a majority of USD swaps at LCH. Recently, however, the CME Group – LCH basis has narrowed and become less volatile.
In fact, the report cites data from CME which shows that savings from their portfolio-margining programme between swaps and interest-rate futures and options on futures set a record in the first half of 2025, up approximately 12% from the daily savings realised during the same period last year. This translated into an $8 bn in daily margin savings.
The demand for these types of capital efficiencies is expected to increase with upcoming clearing mandates as margin costs take centre stage. However, if the CCP basis remerges as a force, then the calculation could, of course, change.
Market participants expect though a new era to be ushered in with the Securities and Exchange Commission mandatory clearing of US Treasuries and repo. The objective of the legislation, which is being phased in from September 2025 to June 2027, is to enhance market transparency, reduce counterparty risk and increase the intermediation capacity of dealers. https://www.jpmorgan.com/insights/markets-and-economy/markets/us-treasury-clearing-mandate).
“Our recent research into the clearing of Treasuries and repo revealed that 70% of derivatives market participants believe the most important attribute of a U.S. Treasury and repo clearinghouse is “cross-margining efficiencies,” according to the report.
