How collateral optimisation can enhance resilience for the buy side
23 September 2025
Ted Allen, product manager for collateral within FIS Íø±¬³Ô¹Ï Finance and Collateral division, explores why collateral optimisation is now central to the buy side, examining drivers, challenges, regulatory developments, and technological solutions shaping the landscape
Image: stock.adobe.com
There are waves of regulatory scrutiny, market reforms, and investor demands rocking the boats of asset managers and other non-bank financial institutions (NBFIs). As the tides of change rise, agile hands are needed to stay on course. Robust collateral management has become essential for risk management, operational resilience, and competitive performance.
Regulators have sharpened their focus on margin and liquidity management, and at the same time settlement cycles are shortening. The ability to deploy collateral quickly and efficiently while avoiding settlement fails has become a defining skill for the modern buy side institution.
Regulatory scrutiny of NBFIs has intensified markedly. In the wake of the liability-driven investment (LDI) crisis and the dash for cash, both the UK’s Financial Conduct Authority (FCA) and the Financial Stability Board (FSB) are now shifting accountability directly onto asset managers, pension funds, and insurers, urging them to ensure prudent risk management, liquidity management, margin preparedness and operational resilience in their collateral management.
These initiatives have moved beyond suggestions of best practice. Building robust collateral infrastructure is now a fiduciary imperative and a regulatory expectation.
Recent stress tests underscore the urgency. The Bank of England’s (BoE’s) System-wide Exploratory Scenario (SWES) stress test revealed that, during periods of market turmoil, traditional repo markets can fail to provide timely liquidity to the buy side just when it is most needed.
This gap has prompted the BoE to consult on the creation of a central bank gilt repo liquidity facility, granting direct access to buy side and non-bank entities. When paired with the FSB’s directive to invest in collateral management and liquidity infrastructure, these initiatives are intended to prevent recurrences of market dislocation and to address underlying liquidity vulnerabilities.
For asset managers, the imperative to generate superior returns for clients means that using cash as collateral is increasingly unattractive. Posting cash, or raising it through the repo market, ties up capital that could otherwise be deployed in higher-yielding investments. This creates a tangible drag on fund performance, diminishing returns and, in some cases, limiting the manager’s ability to fulfil their fiduciary responsibilities.
One of the most significant trends shaping the derivatives market is the rapid increase in the use of non-cash collateral for variation margin (VM). Historically, cash was favoured for its simplicity and liquidity. However, the rising costs of cash driven by higher interest rates and increasing opportunity costs have prompted many buy side firms to look for alternatives.
According to recent International Swaps and Derivatives Association (ISDA) margin surveys, non-cash assets such as high-quality government and corporate bonds now comprise a growing share of VM postings. Cash fell from 73 per cent of VM in 2023 to 68 per cent in 2024, with a corresponding increase in use of corporate and other non-government bonds.
This shift is motivated by the need to preserve cash for investment opportunities, manage liquidity more efficiently, and avoid the performance drag associated with idle cash reserves. Initial margin (IM), particularly under the Uncleared Margin Rules (UMR), remains overwhelmingly securities-based (above 90 per cent), but faces stringent regulatory constraints around eligibility, concentration limits, and wrong-way risk.
The preference for non-cash collateral is therefore clear, though it does introduce challenges relating to eligibility, liquidity management, mobilisation, and settlement. Balancing these factors is central to maintaining fund performance in the current environment. Leading asset managers are adapting policies and infrastructure to diversify their collateral pools, drawing on both internal and external innovation to support this evolution.
The transition to T+1 settlement in the US and the forthcoming move in the UK, EU, and Switzerland requires a fundamental shift in the way collateral, and in particular non-cash collateral, must be managed. Settlement fails have become a prominent risk for buy side institutions, particularly as the cost of failing to deliver now far outweighs the pure opportunity cost of using an asset as collateral. Regulatory regimes such as the Central Íø±¬³Ô¹Ï Depositories Regulation (CSDR) in Europe impose penalties for settlement fails and magnify reputational and operational risks.
Collateral optimisation is indispensable in this context, enabling firms to anticipate shortfalls, allocate assets efficiently, and ensure timely delivery to counterparties. Effective optimisation not only avoids costly penalties but also strengthens relationships with market participants.
Technology, frameworks, and regulation
Technological innovation is empowering asset managers to meet the challenges of collateral management head-on, but what does this mean in practice?
Let’s leave aside for now the much-mooted potential for tokenisation and digital assets moving near instantaneously to provide the solution. While that may provide part of the answer in the longer term, wide-spread adoption and acceptance of digital assets, be they tokenised money market funds (MMFs) or securities remains a tantalising yet distant prospect.
Regulatory frameworks are still evolving, interoperability between platforms is limited, and operational readiness across the buy side is uneven at best. In short, digital assets cannot be a short-term solution to an urgent problem.
The complexity and urgency of today’s collateral challenges demand solutions that are robust, proven, and deployable now. We should remain grounded in practical approaches that leverage existing infrastructure and traditional rails because that is where real-world, pragmatic resilience is built.
Same day non-cash collateral moves in a T+1 settlement environment demand a new approach to managing liquidity and allocating collateral. Shortened settlement cycles compress timelines for collateral mobilisation, recall, and substitution, placing new operational demands on buy side participants. With less time to recall rehypothecated assets or substitute pledged securities, forecasting collateral requirements becomes critical. Firms must ensure that if collateral is recalled, it can be delivered without delay, mitigating the risk of expensive settlement fails. Operational flexibility, robust data, and integrated collateral management systems are key to navigating this new environment.
Collateral teams and portfolio managers have a cooperative relationship under these conditions. The decisions about what collateral to deploy needs to be made based on the anticipated calls calculated at the start of day while repo markets are still liquid. It cannot wait until the calls are received because settlement cycles hamstring the ability to substitute collateral with confidence.
Modern collateral optimisation tools enable firms to mobilise securities rapidly, pre-fund expected collateral requirements where necessary and use predictive analytics to minimise funding costs, maximise funding opportunities while at the same time mitigating fail risk.
Buy side adoption of these platforms is accelerating, as they provide not only more informed, early decision-making about collateral allocations but also support operational efficiency. Alongside the economics of collateral optimisation, automation of collateral selection and booking enables higher volumes of collateral moves, increased velocity of collateral and reduced operational risk.
By integrating these tools, firms gain the agility to adapt to market change and to answer the regulatory need for robust collateral management while mobilising non-cash assets. This combination is essential to safe, efficient markets and ultimately delivering better outcomes for investors.
Collateral optimisation is no longer a niche consideration for the buy side; it is a strategic necessity. The convergence of regulatory change, market evolution, and technological advancement has raised both the stakes and the opportunities for asset managers.
With regulators demanding robust collateral and liquidity frameworks, and stress tests exposing the limitations of current infrastructure, buy side institutions face more scrutiny — and more opportunity — than ever before.
By embracing advanced optimisation tools and strategies, buy side firms can minimise costs, reduce risk, and enhance fund performance, all while adapting to an ever more demanding marketplace. As settlement cycles accelerate, the cost of fails rises, and the collateral ecosystem grows in complexity, those with resilient collateral infrastructure and a proactive approach to optimisation will be best positioned to succeed in the years ahead.
Regulators have sharpened their focus on margin and liquidity management, and at the same time settlement cycles are shortening. The ability to deploy collateral quickly and efficiently while avoiding settlement fails has become a defining skill for the modern buy side institution.
Regulatory scrutiny of NBFIs has intensified markedly. In the wake of the liability-driven investment (LDI) crisis and the dash for cash, both the UK’s Financial Conduct Authority (FCA) and the Financial Stability Board (FSB) are now shifting accountability directly onto asset managers, pension funds, and insurers, urging them to ensure prudent risk management, liquidity management, margin preparedness and operational resilience in their collateral management.
These initiatives have moved beyond suggestions of best practice. Building robust collateral infrastructure is now a fiduciary imperative and a regulatory expectation.
Recent stress tests underscore the urgency. The Bank of England’s (BoE’s) System-wide Exploratory Scenario (SWES) stress test revealed that, during periods of market turmoil, traditional repo markets can fail to provide timely liquidity to the buy side just when it is most needed.
This gap has prompted the BoE to consult on the creation of a central bank gilt repo liquidity facility, granting direct access to buy side and non-bank entities. When paired with the FSB’s directive to invest in collateral management and liquidity infrastructure, these initiatives are intended to prevent recurrences of market dislocation and to address underlying liquidity vulnerabilities.
For asset managers, the imperative to generate superior returns for clients means that using cash as collateral is increasingly unattractive. Posting cash, or raising it through the repo market, ties up capital that could otherwise be deployed in higher-yielding investments. This creates a tangible drag on fund performance, diminishing returns and, in some cases, limiting the manager’s ability to fulfil their fiduciary responsibilities.
One of the most significant trends shaping the derivatives market is the rapid increase in the use of non-cash collateral for variation margin (VM). Historically, cash was favoured for its simplicity and liquidity. However, the rising costs of cash driven by higher interest rates and increasing opportunity costs have prompted many buy side firms to look for alternatives.
According to recent International Swaps and Derivatives Association (ISDA) margin surveys, non-cash assets such as high-quality government and corporate bonds now comprise a growing share of VM postings. Cash fell from 73 per cent of VM in 2023 to 68 per cent in 2024, with a corresponding increase in use of corporate and other non-government bonds.
This shift is motivated by the need to preserve cash for investment opportunities, manage liquidity more efficiently, and avoid the performance drag associated with idle cash reserves. Initial margin (IM), particularly under the Uncleared Margin Rules (UMR), remains overwhelmingly securities-based (above 90 per cent), but faces stringent regulatory constraints around eligibility, concentration limits, and wrong-way risk.
The preference for non-cash collateral is therefore clear, though it does introduce challenges relating to eligibility, liquidity management, mobilisation, and settlement. Balancing these factors is central to maintaining fund performance in the current environment. Leading asset managers are adapting policies and infrastructure to diversify their collateral pools, drawing on both internal and external innovation to support this evolution.
The transition to T+1 settlement in the US and the forthcoming move in the UK, EU, and Switzerland requires a fundamental shift in the way collateral, and in particular non-cash collateral, must be managed. Settlement fails have become a prominent risk for buy side institutions, particularly as the cost of failing to deliver now far outweighs the pure opportunity cost of using an asset as collateral. Regulatory regimes such as the Central Íø±¬³Ô¹Ï Depositories Regulation (CSDR) in Europe impose penalties for settlement fails and magnify reputational and operational risks.
Collateral optimisation is indispensable in this context, enabling firms to anticipate shortfalls, allocate assets efficiently, and ensure timely delivery to counterparties. Effective optimisation not only avoids costly penalties but also strengthens relationships with market participants.
Technology, frameworks, and regulation
Technological innovation is empowering asset managers to meet the challenges of collateral management head-on, but what does this mean in practice?
Let’s leave aside for now the much-mooted potential for tokenisation and digital assets moving near instantaneously to provide the solution. While that may provide part of the answer in the longer term, wide-spread adoption and acceptance of digital assets, be they tokenised money market funds (MMFs) or securities remains a tantalising yet distant prospect.
Regulatory frameworks are still evolving, interoperability between platforms is limited, and operational readiness across the buy side is uneven at best. In short, digital assets cannot be a short-term solution to an urgent problem.
The complexity and urgency of today’s collateral challenges demand solutions that are robust, proven, and deployable now. We should remain grounded in practical approaches that leverage existing infrastructure and traditional rails because that is where real-world, pragmatic resilience is built.
Same day non-cash collateral moves in a T+1 settlement environment demand a new approach to managing liquidity and allocating collateral. Shortened settlement cycles compress timelines for collateral mobilisation, recall, and substitution, placing new operational demands on buy side participants. With less time to recall rehypothecated assets or substitute pledged securities, forecasting collateral requirements becomes critical. Firms must ensure that if collateral is recalled, it can be delivered without delay, mitigating the risk of expensive settlement fails. Operational flexibility, robust data, and integrated collateral management systems are key to navigating this new environment.
Collateral teams and portfolio managers have a cooperative relationship under these conditions. The decisions about what collateral to deploy needs to be made based on the anticipated calls calculated at the start of day while repo markets are still liquid. It cannot wait until the calls are received because settlement cycles hamstring the ability to substitute collateral with confidence.
Modern collateral optimisation tools enable firms to mobilise securities rapidly, pre-fund expected collateral requirements where necessary and use predictive analytics to minimise funding costs, maximise funding opportunities while at the same time mitigating fail risk.
Buy side adoption of these platforms is accelerating, as they provide not only more informed, early decision-making about collateral allocations but also support operational efficiency. Alongside the economics of collateral optimisation, automation of collateral selection and booking enables higher volumes of collateral moves, increased velocity of collateral and reduced operational risk.
By integrating these tools, firms gain the agility to adapt to market change and to answer the regulatory need for robust collateral management while mobilising non-cash assets. This combination is essential to safe, efficient markets and ultimately delivering better outcomes for investors.
Collateral optimisation is no longer a niche consideration for the buy side; it is a strategic necessity. The convergence of regulatory change, market evolution, and technological advancement has raised both the stakes and the opportunities for asset managers.
With regulators demanding robust collateral and liquidity frameworks, and stress tests exposing the limitations of current infrastructure, buy side institutions face more scrutiny — and more opportunity — than ever before.
By embracing advanced optimisation tools and strategies, buy side firms can minimise costs, reduce risk, and enhance fund performance, all while adapting to an ever more demanding marketplace. As settlement cycles accelerate, the cost of fails rises, and the collateral ecosystem grows in complexity, those with resilient collateral infrastructure and a proactive approach to optimisation will be best positioned to succeed in the years ahead.
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