Why KfW revived an old idea for cross-currency collateral

In late March, LCH issued a seemingly innocuous press release: the German development bank KfW had completed a series of test trades in dollar-linked cross-currency swaps using its SwapAgent service.

But there was a twist – instead of collateralising the trades with US dollars, the standard practice on SwapAgent, KfW revived a long unused methodology to post euros as variation margin.

The move has proven to be divisive. Critics say the ‘transport currency’ concept being used to make margin