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Martin O’Connell, Solutions Architect at HQLAX, explores the importance of digital collateral mobility, noting that the objective is not to create a new market structure, but to make non-cash collateral usable in a workflow that is frequent, time-sensitive, and operationally repetitive
The International Swaps and Derivatives Association’s (ISDA’s) recent work on eligible variation margin collateral highlights a familiar conclusion: firms may hold suitable high-quality securities, but operational friction still prevents those assets from being used efficiently for non-cleared derivatives. Digital collateral mobility can close that gap by making non-cash variation margin (VM) faster to settle, easier to substitute, and more reliable to recall.
Variation margin is a simple concept with demanding operational requirements. When market prices move, collateral should move quickly enough to protect both counterparties. In practice, the collateral that moves fastest is not always the collateral that is most efficient to deliver. Cash is familiar and easy to process, but it can be scarce, expensive, and poorly aligned with the available asset profile of many buy side firms. High-quality securities are often available, but they remain difficult to mobilise quickly across different custodians.
ISDA’s August 2026 paper frames this as both an eligibility and an operating model question. Expanding the range of eligible VM collateral matters, but eligibility alone is not enough if onboarding, optimisation, substitution, servicing, and settlement remain slow or uncertain. Recent industry discussion has also tested whether instruments such as tokenised money-market funds could broaden the eligible collateral set. For the time being, however, many of these instruments remain beyond the scope of what receiving banks can typically refinance, limiting near-term uptake. The more immediate opportunity is therefore to make securities that are already eligible easier to move, reuse, and recall.
For many firms, the operational model for securities collateral still reflects a fragmented market structure. Assets may be held at a preferred custodian, in a domestic central securities depository (CSD), through a global custodian, or at a triparty agent. Moving those assets to satisfy an OTC margin call generally requires cross-custodian settlement which must take account of cut-off times, multiple custodian chains, and sequencing across several parties. The process works eventually, but it is often too slow or too uncertain for a market that increasingly requires real-time exposure management.
Digital collateral mobility addresses this problem by changing what has to move. Securities can remain within existing custody and safekeeping arrangements, while ownership is transferred on a digital collateral ledger. The underlying asset does not need to move across custodians each time a margin obligation is settled. Instead, the ownership record changes at a precise moment in time, with a digital collateral record acting as the operational link between the asset, the giver, and the receiver. The objective is not to create a new market structure for its own sake.
The objective is to make non-cash collateral usable in a workflow that is frequent, time-sensitive, and operationally repetitive. Variation margin is a natural use case because the settlement requirement is clear, the timing pressure is real, and the benefits of reducing friction are immediate.
The first benefit is faster settlement. If ownership can transfer on-ledger in near real time, participants can satisfy VM calls
using securities that would otherwise be operationally trapped. This reduces the need to fall-back to cash simply because cash
is easier to move. For dealers, faster settlement improves access to securities collateral and supports more efficient reuse where permitted. Collateral received on-platform can be reused in approved triparty or other collateral workflows without leaving the digital collateral environment. For the buy side, the benefit is the ability to meet VM obligations without unnecessary cash drag.
Faster settlement also improves certainty. Traditional settlement chains create timing mismatches, settlement fails, and give-before-you-get exposures. Delivery-versus-delivery substitution can remove much of this uncertainty. If one security is being recalled and another is being delivered, both ownership transfers can be synchronised. Participants do not need to over-collateralise while waiting for one leg of the substitution to complete.
For buy side firms, recall confidence is essential. Fast delivery is not enough if the asset cannot be returned when the portfolio manager or collateral team needs it. Funds cannot treat securities as an efficient source of VM if recall depends on external settlement chains, manual intervention, or a long onward reuse chain outside their control.
A controlled on-platform reuse model can address this concern. The receiver may be able to reuse the securities, but only through agreed platform workflows. That keeps the asset within a short reuse chain and avoids unnecessary external settlement. When the giver needs to recall the security, the return and replacement delivery can be coordinated through the same digital rails used for the original VM transfer.
This is the key alignment point. Dealers want collateral that can be reused efficiently. Buy side firms want predictable recall and operational control. A platform model that supports reuse, but constrains it to transparent and controlled workflows, can satisfy both requirements. The receiver can make productive use of the collateral, while the giver can be confident that recalls and substitutions will not be delayed by avoidable market-level settlement.
Adoption will depend on whether digital collateral mobility feels like an extension of existing collateral operations rather than a parallel market structure. Many buy side firms do not want to build a digital asset operating model from scratch simply to post securities for VM. They want their custodians, advisers, and collateral platforms to connect using familiar instruction flows, reporting standards, and account structures.
That is why standard messaging and custody-chain preservation are important. A fund may instruct through its existing custodian or adviser. The custodian may hold assets in fund-specific accounts, support the creation of digital collateral records, and provide reporting back to the fund or depositary. The underlying securities remain within a regulated custody structure, while the digital layer provides the ownership transfer and orchestration needed to settle VM more efficiently. Buy side financial institutions exploring how this model could apply to their own VM workflows should engage with HQLAX to understand how digital collateral mobility can be integrated with existing custody, advisory, and collateral management arrangements.
For the sell side, the same principle applies. A dealer should be able to receive securities collateral in a form that satisfies the relevant documentation, supports title transfer where required, and can be reused within agreed constraints. The model should not weaken legal certainty or collateral eligibility; it should improve the speed and precision with which eligible collateral is delivered and managed.
The commercial case becomes stronger when VM is considered alongside broader collateral requirements. Firms are under pressure from shorter settlement cycles, intraday liquidity demands, real-time risk monitoring, and the need to optimise collateral across multiple counterparties. A digital collateral mobility layer can help address these pressures by reducing unnecessary settlement movements, lowering operational risk, and making collateral available when and where it is needed.
For buy side firms, the strategic benefit is optionality. A fund can continue to hold high-quality assets with its preferred custodian, but still use those assets more dynamically to meet margin calls. It can reduce reliance on cash, avoid unnecessary collateral transformation, and maintain better control over security-level inventory. For dealers, the benefit is a more predictable source of eligible collateral, received with clear ownership and capable of being channelled into reuse workflows where permitted.
There is also a resilience argument. If securities can be mobilised outside traditional custodian cut-off times then firms can reduce the buffers they hold against settlement uncertainty. In stressed markets, that can be the difference between using collateral efficiently and being forced into costly liquidity actions at short notice.
Digital collateral mobility should not be seen as a replacement for custodians, CSDs, triparty agents, or existing legal frameworks. Its value lies in connecting those structures more effectively. Tokenisation or digital representation is only one part of the story.
The more important capability is orchestration: coordinating ownership transfer, settlement conditions, substitutions, recall controls, and reporting across multiple participants while preserving the integrity of the underlying custody model. HQLAX operates at the centre of this operating model, enabling participants to achieve the benefits of a digital collateral operating model without re-building their existing business processes. That is the opportunity for non-cash VM. Market participants do not need a more complex collateral process; they need a faster and more reliable one.
“Firms that solve the mobility problem will be better placed to reduce cash drag, improve collateral velocity, lower operational risk, and respond to margin calls with greater precision”
By decoupling ownership transfer from unnecessary cross-custodian movement, digital collateral mobility can make securities a more practical alternative to cash for OTC VM. By supporting controlled reuse and atomic substitution, it can also give the buy side confidence that securities delivered today can be recalled tomorrow.
The industry discussion on eligible VM collateral is therefore only the starting point. The more important question is how collateral will move. Firms that solve the mobility problem will be better placed to reduce cash drag, improve collateral velocity, lower operational risk, and respond to margin calls with greater precision.
In a market moving towards real-time settlement and more intensive liquidity management, digital collateral mobility is likely to become a core market infrastructure capability.
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