4 Ways FCMs Can Reclaim the Hidden Collateral Tax and Safely Scale in Volatile Markets

Up to 25% of collateral held by clearing members isn’t generating returns 

This level of collateral inefficiency is leaving billions in non-remunerated assets on balance sheets, effectively stranding liquidity at the point it is needed most.

Recent research from Nasdaq and The ValueExchange, “Making the case for Tokenised Collateral” assessed how institutions are managing the challenges of extreme market volatility, such as the 109% surge in capital demand, severe inventory fragmentation and operational strain witnessed during the 2026 Hormuz Shock. 

Yet the more persistent issue is not volatility itself, but how collateral is being managed. 

The report identifies a “hidden collateral tax” driven by the continued reliance on manual processes:

• 70% of respondents reported daily settlement matching and delivery issues
• 35% post more than half their collateral overnight just to ensure timely delivery
• Firms are maintaining an average 7% excess buffer

These are not isolated inefficiencies – they’re structural workarounds that have become embedded in day-to-day operations.

This precautionary behaviour is resulting in a significant pool of idle capital that fails to generate returns

For Tier 1 firms that hold roughly $40 billion in such collateral, reclaiming this “tax” through automation could lead to an annual interest earning increase of $376 million.

Maintaining resilience and profitability requires FCMs to prioritise operational efficiency, optimise balance sheet performance, and scale capacity in such a dynamic and demanding environment. During the 10 years I spent as an Optimisation Liquidity Manager for a major FCM, followed by my experience at Baton working with some of the world’s largest clearing firms, I’ve come to realise just how significant these challenges can be. And importantly, the critical role technology can play in overcoming them.

I’ve written this post to provide market participants with five practical steps for effectively tackling these priorities.

Volatility Is Exposing the Limits of Legacy Collateral Models 

Before we look at the solutions, it is important to recognise the enormous strain market volatility continues to place on clearing members. Following the 2025 tariff announcements, derivative-related margin calls across major FCMs surged by an estimated $31 billion in a single month¹. This pressure intensified in early 2026 as global shocks triggered disorderly price corrections across energy markets².

Furthermore, the regulatory response has sharpened with the FCA moving toward active enforcement of CP25/38 anti-dilution mandates³. This shift places a premium on dynamic rather than static liquidity management, as supervisors now scrutinise the time it takes for firms to convert assets into cash down to the minute. 

The direction is clear. Static collateral strategies and manual processes cannot keep pace with intraday risk and regulatory scrutiny. 

The ability to automate collateral movements and gain real-time visibility is no longer just an efficiency play but a regulatory necessity for maintaining operational solvency, profitability, and client competitiveness

Rising to the Challenge With Scalable and Interoperable Technology Solutions

How can FCMs maximise collateral efficiency and handle growing trade volumes and margin calls amidst such volatile conditions? The best path forward is using smart, real-time technology to handle collateral. By automating the slow manual parts, you save time, lower costs, and can handle much higher trade volumes with ease.

Furthermore, from a very practical perspective, this needs to be technology able to integrate seamlessly with the firm’s existing systems and processes, versus requiring the immediate rip out and replacement of what’s come before.

4 Recommendations for Optimising Operational and Collateral Efficiency and Scaling Capacity

Here are the key steps FCMs can take to achieve their goals in this context. 

1. Gain Real-Time Visibility of Collateral and Margin Obligations 

Effective collateral margin management begins with accurate, real-time visibility of sources and uses of cash and non-cash assets. Consolidating data from multiple venues, custodians, and counterparties into a unified view can help firms identify available liquidity across accounts and meet obligations without delays. 

Real-time visibility also enhances decision-making by enabling firms to locate unencumbered assets quickly, evaluate margin trends and deficit positions intraday, and track inefficient collateral optimisation, all of which can help reduce the risk of liquidity strain. 

2. Automate Eligibility Evaluation, Optimise Collateral Allocations and Movements

Optimising collateral placement can bring significant capital benefits when driven by automation. Configurable, no-code rules allow clearing members to streamline and optimise allocation processes and accelerate the deployment of available assets to where they will prove most effective.

Elevate Existing Collateral Optimisation Processes

Tools that automate the complex task of assessing collateral asset eligibility across counterparty requirements boost operational efficiencies, enabling FCMs to scale more effectively. By integrating these tools into collateral optimisation processes, FCMs can benefit even further by elevating the accuracy of portfolio recommendations. This can have a substantial economic impact, ensuring portfolio recommendations are based on precise and informed eligibility assessments tailored to specific accounts, products, and counterparties.

Execute Collateral Movements Faster

Next, FCMs need to focus on automating the execution of movement instructions to build out operational capacity. Advanced collateral management systems feature rules-based frameworks that can be leveraged to configure intelligent, automated workflows for the execution of bulk cash and collateral pledges or recalls across multiple venues via a single interface. Yes, this minimises manual intervention and removes bottlenecks, but possibly, even more importantly, it enables FCMs to activate funding decisions faster. In doing so, it provides the agility necessary to respond quickly and effectively in volatile market conditions.

Unlock Tokenisation Opportunities

The next phase of collateral optimisation will be shaped by the ability to operate in a more connected, real-time environment. As digital assets gain traction, firms are starting to explore how tokenised cash and securities can address long-standing constraints such as cut-off times, settlement windows, and time zone fragmentation. The shift towards a more continuous, 24/7 operating model is becoming increasingly practical.

However, unlocking this opportunity depends on having the right operational foundation in place. Firms need the ability to:

• Access real-time balances across accounts and venues
• Automate collateral allocation and movement decisions
• Integrate seamlessly with CCPs, custodians, and banking infrastructure

Without this, tokenisation risks becoming another silo rather than a source of efficiency.

With the right level of automation and connectivity, collateral can move from being static and over-buffered to dynamic and actively deployed. This enables firms to reduce excess buffers, improve liquidity utilisation, and respond more effectively to intraday demands.

With more than half of firms expected to transition to automated collateral management by the end of 2026, the move towards a more agile and interconnected post-trade environment is already underway.”

3. Enhance Liquidity Forecasting and Stress Testing 

Forecasting liquidity demand accurately during periods of heightened market activity is essential for sustained financial resiliency. Advanced liquidity models based on firm foundations using high-quality real-time and historical data enable FCMs to predict cash flow requirements under various stress scenarios more precisely. 

These tools also empower firms to simulate market conditions, assess potential vulnerabilities, and proactively implement strategies for mitigating liquidity risks. Whether faced with consecutive days of margin calls or an unplanned client delay, efficient forecasting ensures that clearing members are better prepared to meet obligations without compromising operational efficiency. 

4. Improve Collateral Efficiency and Return on Capital 

To compete effectively, FCMs must focus on maximising asset utilisation and minimising overfunding. By integrating real-time insights into collateral usage, firms can avoid unnecessarily tying up expensive, high-quality liquid assets and rapidly redeploy funds to optimise capital return. 

Sophisticated optimisation tools help firms establish movement corridors and deploy assets where they deliver the greatest economic benefit. These strategies form the backbone of balance sheet efficiency, enabling firms to remain competitive amidst evolving capital requirements and market dynamics. 

Intelligent, Scalable Technology and Its Role in Collateral Operations 

Investing in intelligent, scalable collateral management systems is no longer optional for clearing members. Post-trade innovations are now available to address pain points such as inefficient collateral workflows, fragmented and inconsistent data, and an ongoing reliance on manual processes. 

For instance, Baton Systems’ advanced collateral management software empowers FCMs with intelligent, automated collateral management workflows, real-time alerts, and direct two-way connectivity to the major CCPs (covering 96% of initial margin worldwide) to simplify and streamline collateral management.

By providing on-demand access to real-time balances held across banking, CCP and Carry Broker relationships and eligibility schedules, institutions can effectively optimise collateral allocations and then efficiently instruct bulk asset and collateral movements across multiple venues. Combined these capabilities enable FCMs to automate and optimise their collateral management operations.

Ensuring Resiliency and Collateral Efficiency Through Preparedness 

The ongoing pressures faced by FCMs make it clear that scalability, efficient margin management, and increasing balance sheet performance are now critical for survival in an increasingly competitive and volatile market. Clearing members can optimise capital, reduce risks, and maintain their competitive edge by automating collateral mgmt workflows, gaining real-time insights, and adopting advanced tools.

If you’d like to explore specific strategies to enhance operational efficiency, manage volatility more effectively, or unlock greater value from your balance sheet, reach out directly via our contact form and we can arrange a time to speak.

¹Margin Volatility: Data sourced from CFTC and CME Group tracking the $31bn spike in initial and variation margin calls following the April 2025 reciprocal tariff announcements.
²Hormuz Shock: Estimated €24bn Q1 2026 EU energy import surcharge based on “The Hormuz Shock” policy briefs from the FREE Network and Stockholm School of Economics (released March 23, 2026).
³FCA CP25/38: Financial Conduct Authority, Consultation Paper 25/38: “Enhancing fund liquidity risk management” (Dec 9, 2025). This mandate requires authorised fund managers (AFMs) to adopt mandatory anti-dilution tools and annual retrospective reviews as of Q1 2026.