Optimal Posting of Sticky Collateral

Abstract

We study optimal strategies for posting collateral for OTC derivatives under Credit Support Annexes (CSAs) where "substitution rights'' either do not exist or are hard to enforce. We present a simplified model which we are able to solve approximately in an efficient manner. Additionally we show that the optimal posting strategy is defined by the relation between suitably-defined term, rather than instantaneous, collateral rates, as would be the case in "full substitution'' situations that have been studied in the literature so far.

Keywords: OTC, CSA, Credit Support Annex, Collateral, Substitution rights, Sticky, HJB, dynamic programming

JEL Classification: C61, G13, G21