The Changing Shape of Variation Margin Collateral

Why It Matters

The move toward non‑cash VM reshapes liquidity and risk management, while tri‑party infrastructure could streamline operations and reduce settlement risk across the derivatives market.

Key Takeaways

• 57% sell‑side, 33% buy‑side raise non‑cash VM usage.
• Government bonds top non‑cash collateral choice.
• Settlement fails hinder non‑cash VM adoption.
• One‑quarter firms adopt tri‑party for margin.
• Valuation mismatches remain key operational challenge.

Pulse Analysis

Variation margin (VM) has traditionally been posted in cash, a practice that simplifies valuation and settlement for uncleared derivatives. However, rising funding costs, tighter regulatory capital rules and repeated market‑stress episodes have forced banks and asset managers to reassess this approach. Non‑cash assets such as sovereign and investment‑grade corporate bonds can reduce cash outflows and improve balance‑sheet efficiency, but they also introduce valuation and liquidity complexities. As the industry grapples with these trade‑offs, collateral managers are actively exploring alternatives to the cash‑only paradigm.

A recent Risk.net survey of 114 collateral‑management specialists reveals a clear shift. Fifty‑seven percent of sell‑side firms and thirty‑three percent of buy‑side firms report steadily increasing their use of non‑cash VM, with government bonds, high‑grade corporates and supranationals emerging as the preferred instruments. Despite this enthusiasm, respondents cite settlement fails and valuation discrepancies as the primary operational hurdles. The data also highlight a divergence in ambition: sell‑side participants are more aggressive in expanding non‑cash usage, while buy‑side firms remain more cautious.

The growing reliance on non‑cash collateral is driving interest in tri‑party clearing structures, which promise greater scale, transparency and risk control. Approximately one‑quarter of surveyed institutions already employ tri‑party services for both initial margin and VM, and many others are evaluating the model as a way to mitigate settlement risk and streamline margin calls. If tri‑party infrastructure matures, it could accelerate the broader adoption of non‑cash VM, reshaping liquidity management across the derivatives market and influencing regulatory discussions on collateral standards.