Why One-Way CSAs Are Structurally Value-Destructive

One-way CSAs are widely used by supranationals and public-sector borrowers on the premise of strong credit quality. In modern derivatives markets, however, they are a structurally inefficient mechanism that embeds persistent costs, distorts pricing, and transfers economic value to dealers without delivering meaningful counterparty risk reduction compared to a two-way CSA.

They Preserve Credit Risk That Could Be Eliminated

Under a properly calibrated two-way CSA, variation margin removes mark-to-market exposure and initial margin covers gap risk. This reduces credit risk to a negligible level.

A one-way CSA blocks this outcome. Instead of neutralising exposure through collateral, the dealer is forced to carry a permanent uncollateralised position. 

They Create Ongoing, Invisible Costs (XVA, Capital, Funding)

Uncollateralised portfolios generate CVA, FVA, capital consumption (KVA), and leverage balance-sheet usage. These costs are real, recurring, and embedded directly into pricing.

Critically, the client is effectively charged at dealer funding and capital costs, even when it could fund more cheaply itself via collateralisation.

Result: a structurally expensive funding model disguised as a credit decision.

They Break Competitive Pricing

In an uncollateralised portfolio (or under a one-way CSA), pricing of new trades is dominated by incremental XVA rather than pure market risk.

Crucially, XVA is dealer-specific. Even when calculated using broadly consistent methodologies for CVA and FVA, the resulting adjustment varies materially across dealers due to differences in portfolio composition and netting effects.

The same trade interacts differently with each dealer’s existing book:

• Netting sets are not shared
• Existing exposures and hedges differ
• Incremental exposure - and therefore XVA - is portfolio-dependent

As a result, the incremental XVA applied to an identical trade can vary significantly across dealers. These differences are structural, non-transferable, and not knowable across dealers in advance. This has a direct behavioural consequence.  Each dealer knows that its own XVA will be a major driver of its final price, but has no visibility into competitors’ XVA positions. The outcome of a trade is therefore heavily influenced by relative, unknowable portfolio effects, rather than by the quality of market risk pricing.  Because of this:

• Dealers cannot reliably improve their chances of winning by tightening the market risk component of the price
• The decisive factor is often their structural XVA position, not pricing precision
• The win/loss outcome becomes partially independent of the effort applied to pricing the trade

Rational dealers respond accordingly. There is limited incentive to compress bid-offer spreads (which directly reduces P&L) when doing so does not materially increase the probability of execution.

In effect, dealers are competing on different internal economic positions, rather than on a common, observable market price.

Similarly, dealers with favourable XVA positions (for example due to portfolio offsets or capital relief) are not compelled to pass that advantage through, because competitors may face entirely different incremental costs.

Result:
Competitive tension is structurally weakened, and the client does not receive best execution on the market risk component of trades. Win/loss outcomes are determined more by portfolio effects than market competition.

In a two-way CSA framework, XVA is largely neutralised and competition refocuses on observable market pricing - restoring genuine price discovery and execution quality.

In other words, the client is systematically “Short an Option”

The pricing outcome is asymmetrical. XVA costs are passed through reliably, while XVA benefits are typically retained by dealers unless competed away.

This creates a structurally negative payoff profile: downside is certain, upside is uncertain and usually lost.

This is not a failure of execution or negotiation; it is an inherent feature of the one-way CSA structure.

Result: persistent value leakage from client to dealer.

They Perform Poorly in Stress

One-way CSAs complicate trade portability, increase friction in default scenarios, and constrain dealer balance sheets when capacity is most needed.

By contrast, bilateral collateralisation aligns with modern clearing, resolution, and risk-management frameworks.

Result: weaker resilience and reduced market efficiency in stress conditions.

The Alternative: Two-Way CSA with Initial Margin

A two-way CSA with appropriately calibrated initial margin is strictly superior. Variation margin eliminates ongoing exposure, and initial margin quantifies and contains gap risk.

This structure removes dealer funding distortions, compresses XVA to levels consistent with true economic risk, and restores clean, competitive pricing. It also strips out dealer-specific balance-sheet effects from price formation.

Bottom Line

A one-way CSA is not a conservative structure; it is an economically inefficient one.

It preserves avoidable credit risk, embeds recurring XVA and funding costs, distorts competition, and systematically transfers value to dealers - all without delivering meaningful additional protection.

A move to bilateral collateralisation is not about taking more risk. It is about eliminating unnecessary cost and reclaiming economic value already embedded in the portfolio.