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Many pension schemes, insurers and asset managers balk at the drag on returns associated with holding lots of safe assets to post as collateral.
According to Jerry Marshall of Yiyang Trading, a commodities trader and a former senior cotton trader at Cargill, the amount of money the exchanges require traders to post as collateral on futures contracts has risen drastically as volatility has grown.
The Treasury during the Obama administration has recouped all of the bank loans and taxpayers have earned money, thanks to the interest the banks had to pay and the proceeds the Treasury recovered upon selling the warrants that banks had to post as collateral.
Masaaki Fujii and Akihiko Takahashi (Fujii, Takahashi, 2011) showed the impact of this on derivatives pricing by pricing the embedded cheapest-to-deliver option dealers have in a cross currency swap, which gives them a choice of currencies to post as collateral.
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This also happens if there are credit downgrades on the bonds posted as collateral.
While the banks got cash, they still have to pay back the central bank loans in the future, and they still own the assets they posted as collateral.
Lisa Williams, a 50-year-old administrative assistant in Winston-Salem, N.C., noticed an irregularity after receiving a roughly $3,700 Springleaf loan: A lawn mower she posted as collateral was valued at $800.
In Hong Kong, the body which stands behind trades on the Hong Kong futures and options exchanges has concluded that some US Treasury bonds posted as collateral are more risky than in the past.
Trading through a clearinghouse normally requires cash to be posted as collateral by the hedger, unlike for bilateral over-the-counter transactions, in which there is no such requirement.
Banks resort to this to help them meet regulatory capital requirements, or to get further financing from a central bank that requires high-quality assets to be posted as collateral.
The trading strategy of the bank needs funding for raising variation margin and initial margin that need to be posted as collateral.
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