Eligible Collateral

Eligible collateral is the defined set of assets that two parties to a derivatives, repo, or securities-financing transaction agree, in advance, can be used to satisfy a margin obligation. Rather than accepting anything of value, counterparties negotiate a specific schedule, listing which currencies, government bonds, equities, or other instruments qualify, and under what conditions, before any collateral actually changes hands. The schedule exists because not all assets are equally reliable as security: some are hard to sell quickly, some can lose value sharply in a crisis, and some are tied too closely to the posting party's own credit to be useful if that party defaults.

The eligible collateral schedule is usually set out in a credit support annex attached to a derivatives master agreement, or in the terms of a repurchase agreement (repo), and it works together with a collateral haircut applied to each asset type and, often, a concentration limit capping how much of one asset or issuer can be posted. It is a central part of the broader collateral management process used by banks, prime brokers, and central counterparties (CCPs) to control their exposure to a counterparty.

Think of a pawnbroker who does not accept just anything brought through the door. The shop has a list: gold, watches of certain brands, maybe a car with clear title, but not furniture, not perishable goods, and not anything the pawnbroker cannot resell quickly if the loan is not repaid. Before any item is handed over, both sides already know what will be accepted and roughly how much credit it will be given.

An eligible collateral schedule is that list for a financial trade. The two parties agree, before any money or risk changes hands, exactly which assets will count as acceptable security, and the list is deliberately conservative: an asset that is hard to sell quickly, or whose value could collapse at the same moment the other party gets into trouble, is usually excluded or given less credit.

• Liquidity: an asset must be sellable quickly and at a predictable price, which is why high-quality government debt such as Treasury bills and Treasury bonds dominates most eligible collateral lists.
• Credit quality: lower-rated bonds or equities are either excluded or accepted only with a much larger haircut.
• Wrong-way risk: an asset issued by, or closely linked to, the posting party's own group is typically excluded, since its value could fall exactly when the counterparty needs the collateral most.
• Currency: collateral posted in a currency other than the exposure's own currency is usually accepted but haircut more heavily to account for FX movement.

Every eligible asset on the schedule carries its own haircut, a discount applied to its market value to build in a buffer against price moves before the collateral can be sold. Government securities typically carry small haircuts, while equities and lower-grade bonds carry larger ones. Many schedules also cap concentration, limiting how much of a single issuer's debt, or how much of one asset class overall, can make up the collateral posted, so that the receiving party is not left overexposed to the fortunes of one issuer.

The eligible collateral schedule is negotiated between counterparties and reflects their relative bargaining power and risk appetite. A smaller counterparty transacting with a much larger bank will often be offered a narrower list, limited mostly to cash and top-rated government debt, while two large banks trading with each other may agree a broader list that includes a wider range of fixed income securities and equities, each carrying its own negotiated haircut. Once agreed, the schedule is rarely renegotiated trade by trade; instead it is reviewed periodically, or whenever a market stress event reveals that an asset on the list behaved less reliably as collateral than its haircut had assumed.

Since the 2008 financial crisis, regulators have pushed for more standardized and conservative collateral eligibility rules for over-the-counter derivatives, particularly through uncleared margin rules developed under the Basel Committee and the International Organization of Securities Commissions, and reflected in frameworks such as MiFID II in Europe and reforms following the Dodd-Frank Act in the United States. These rules generally restrict eligible collateral for regulatory margin to highly liquid, high-quality assets, and require minimum haircuts set out in regulatory schedules rather than left entirely to private negotiation. Firms operating across multiple jurisdictions must track several overlapping eligibility regimes at once, since the collateral acceptable for a cleared trade, a bilateral uncleared derivative, and a repo can each be governed by a different rulebook.

• Basel Committee on Banking Supervision
• International Swaps and Derivatives Association (ISDA)