Avoiding Collateral Surprises: Managing Multi-Currency CSAs and Cheapest-to-Deliver (CTD) Curve Construction

This article explores the embedded optionality of multi-currency CSAs and the related challenges financial practitioners are facing in terms of collateral management and optimization. It highlights why efficient collateral management is fundamental in the new post-crisis world, and identifies why cheapest-to-deliver (CTD) collateral can be
necessary for profit, effectiveness and liquidity.

Further, this study outlines several illustrative examples on how to construct CTD curves and demonstrates how CTD curves enable practitioners to select appropriate collateral. It also provides several pricing case studies involving interest rate swaps. As we come to better understand the complexity of current CSA agreements, the article uncovers what the future might look like with the new standard CSA to reduce optionality.