CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

29.7 COLLATERAL INCOME AND SEGREGATION ISSUES

The collateral posted by the customer of the clearing broker remains the property of the customer and is supposed to be segregated from the clearing broker's funds. In principle, then, customers stand to earn interest or dividends on whatever collateral they have posted. Just how much, though, is limited by the costs of managing cash and the type of collateral that the various clearinghouses require. Unless the trading client posts exactly the kind of collateral that each clearinghouse requires in exactly the right amounts, the clearing broker will incur costs in converting whatever the client has deposited into whatever the clearinghouse requires. In addition, the daily settlement of gains and losses will require that collateral be bought and sold in various currencies, which also entails costs. As a result, customers face a steady tension between maximizing income and minimizing costs, which occupies a great deal of time, energy, and attention in managing a futures portfolio efficiently.

The difference between a good CTA and an excellent CTA may come down to the way they handle the complexities of collateral, segregated funds (various forms and provisions), and single currency margining, as well as the costs and noise involved in managing foreign exchange balances. Exchanges have well-defined ideas about the kinds of collateral they accept, while many investors have strong ideas of their own about the kinds of collateral they want ...