Collateral and Liquidity Efficiency in the Derivatives Market: Navigating Risk in a Fragile Ecosystem

Central clearing and margining of non-cleared derivatives have contributed to a significant reduction in counterparty credit risk. However, delays and inefficiencies in sourcing and posting collateral can quickly lead to increased liquidity risk, particularly during periods of stress. Persistent inefficiencies risk cascading liquidity crises, undermining the post-crisis reforms that were designed to curb systemic risk. Current market conditions, including quantitative tightening, geopolitical tensions and the continued implementation of non-cleared margin rules, demand urgent action.

Recent stress events – including the 2020 dash for cash, energy market volatility and the 2022 UK gilt market crisis – have exposed critical weaknesses in collateral frameworks, threatening financial stability. The market faces three main challenges: the need for cost reduction, liquidity improvement and efficient operations. The ‘risk triangle’ – market risk, counterparty credit risk and liquidity risk – frames all these challenges. Each of these elements must be considered in the context of the fragmented market, with diverse players seeking different solutions.

This whitepaper, developed by the 2024/2025 cohort of the ISDA Future Leaders in Derivatives program, examines the growing challenges of collateral efficiency and liquidity resilience in the global derivatives market. The paper addresses issues driven by regulatory complexity, market fragmentation and systemic vulnerabilities. It outlines practical strategies to address these issues, balancing the costs of collateral, risk management, regulatory compliance and technological innovation.

Click on the attached PDF to read the full report.

Documents (1) for Collateral and Liquidity Efficiency in the Derivatives Market: Navigating Risk in a Fragile Ecosystem

Paper on Proposal 6 on Margin Transparency

On November 16, ISDA published a document that looked at proposal 6 in the final Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) report on margin transparency. Proposal...

Tender Issued for DC Administrator Role

ISDA and the Credit Derivatives Governance Committee have issued an invitation to tender for an independent regulated entity to serve as the administrator for the Credit Derivatives Determinations Committees (DCs), which includes assuming the role of DC secretary. The DC...

ISDA SIMM: The Standard for IM Calculations

The ISDA Standard Initial Margin Model (ISDA SIMM) plays an important role in ensuring margin calculations are consistent, transparent and aligned with global best practices and regulatory requirements. Since its launch in 2016, the model has been rigorously tested, regularly...