Collateral is still treated as plumbing in many institutions.
That assumption is now wrong.
Post-crisis market structure has turned derivatives into capital-intensive instruments. Initial margin, cash variation margin, segregation, and conservative margin models now immobilise balance-sheet capacity in ways that directly affect portfolio performance and liquidity resilience.
Portfolios often underperform without markets moving against them because capital is quietly trapped in margin, buffers, and frictional processes that sit outside the investment decision loop.
Lifecycle collateral costs are routinely underestimated. Path dependency amplifies liquidity strain under stress. Optimisation efforts fail not because the tools are wrong, but because governance, sequencing, and ownership are misaligned.
What actually drives outcomes is unambiguous: treating collateral as capital, not operations; choosing instruments through a full lifecycle lens; designing counterparty relationships and CSAs deliberately; and making explicit trade-offs between simplicity, flexibility, and resilience.
Under real stress, collateral does not behave smoothly. Buffers are a poor substitute for structure. Margin velocity overwhelms liquidity planning and forces decisions at exactly the wrong time.
This is about capital economics, not plumbing – and why institutions that understand the difference protect returns and survive stress while others quietly bleed performance.
Read the practitioner paper
Collateral Drag – Capital Economics of Modern Derivatives