Collateral backing non-cleared derivatives transactions fell by more than 6% to US$5.01trn last year, according to the 2015 Isda Margin Survey, as trades shifted away from over-the-counter markets to centrally-cleared venues.
The drop comes despite an increase in the amount of collateral received and delivered against non-cleared derivatives – the two saw gains of 4.4% and 28.6% respectively during 2014 – with expiring trades rolling off and not being replaced.
The latest survey was based on the responses of 41 market participants across 20 countries, while the previous year saw responses from 59 firms.
Cash accounted for more than three-quarters of collateral delivered and received. The bulk was in US dollars and euros, but the biggest increases were seen in other currencies, in particular, Japanese yen.
Use of credit support annexes for non-cleared swaps increased across all asset classes with the figure hitting 97% and 91% for credit and equity derivatives respectively. Commodity derivatives had the lowest use of CSAs at under 60%.
A widespread shift of standardised swaps transactions into central counterparty clearing firms drove big increases in the amount of collateral backing cleared derivatives transactions. The figure jumped by 50% over the 12 months to December 2014 to hit US$455bn. An even bigger jump was seen in the amount of collateral relating to client clearing, which more than quadrupled.
Optimisation strategies
With new margin rules for non-cleared derivatives set to go live in September 2016 and more instruments being pushed through central clearing, particularly in Europe where the mandate is yet to take hold, collateral optimisation has become more important to market participants.
The survey found that 66% of firms optimise their collateral. More than 83% of large firms, with over 3,000 derivatives agreements outstanding, participate in optimisation with 70% of those employing the strategy on a systematic basis.
Just 33% of small firms, those with up to 100 outstanding contracts, participated in optimisation, but all of those did so on a systematic basis.
The survey notes a broad split in the functions dealing with collateral optimisation across firms. Front office was the most common function, accounting for almost 35% of activities. The small preference for front office reflects the liquidity risk, funding costs, capital costs and other associated factors that are common activities of trading desks, Isda notes. However, 29% of firms considered the activity as an operations function while credit and treasury departments accounting for 13% and 16% of optimisation activities respectively.
Despite the rising array of external providers, collateral management remains an in-house activity. No firms surveyed managed all of their collateral externally. A third of large firms managed some collateral externally, while no small participants used external providers for any collateral management.