How derivative book fragmentation and legacy CSA mechanics turn credit stress into forced liquidity events
Sector: Infrastructure – Operating Assets
Asset Class: Diversified Infrastructure (Transport, Utilities, Renewables, Social)
Situation Type: Operating portfolio with long-dated derivatives accumulated across multiple acquisitions
Primary Issue: Portfolio-level counterparty concentration and downgrade-triggered collateral risk – not hedge failure or market loss
The Situation
A diversified infrastructure fund held a large, long-dated derivative book built incrementally through asset acquisitions.
Each hedge was appropriate at the time of execution.
At portfolio level, the aggregate structure had become fragile under counterparty credit stress.
Derivative exposures were concentrated across a small number of counterparties and were governed by legacy CSAs with downgrade triggers, step-down thresholds, and asymmetric collateral mechanics.
On paper, the portfolio was fully hedged.
In practice, a counterparty credit event would have triggered forced liquidity actions, compressed decision timelines, and value leakage unrelated to asset or hedge performance.
The issue was not hedge effectiveness.
It was whether the derivative ecosystem could absorb a credit shock without forcing action under pressure.
This was a control and resilience decision, not a market view.
Why This Scenario Is Common
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Derivative books grow transaction-by-transaction, not portfolio-designed
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Counterparty concentration creeps beyond policy intent without escalation
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Legacy CSAs remain in place under outdated credit assumptions
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Downgrade triggers and collateral mechanics are not stress-tested end-to-end
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Governance focuses on hedge presence, not ecosystem behaviour
Nothing fails day-to-day. Stress simply converts credit events into decision clocks.
Why It Matters
When counterparty credit stress drives liquidity behaviour:
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Margin calls accelerate regardless of asset or hedge performance
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Independent amounts activate simultaneously across counterparties
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Decision windows collapse from months to days
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Pricing power shifts entirely to dealers
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Boards face forced choices under governance and timing pressure
Economic loss is not the first risk. Forced action is.
How This Is Typically Addressed
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Reducing notional exposure without fixing structure
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Ad-hoc novations under dealer-driven pricing
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Brute-force terminations that crystallise value leakage
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Adding counterparties without modelling net collateral impact
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Relying on policy limits without operational playbooks
These approaches reduce optics, not fragility.
Primary Engagement Route
Primary Offer: Derivatives Portfolio Review™ Counterparty concentration analysis, CSA trigger mapping, liquidity impact modelling, and downgrade-event playbook design.
Secondary / Bespoke: Hedge Rebuild™, novation and termination sequencing, CSA renegotiation, counterparty diversification strategy.
Read the IC Brief → (2-page decision summary)
Full structural narrative shared selectively on request.
Illustrative scenario for discussion purposes only. Not a transaction summary or client-specific case study.