Before revision: This article studies derivatives pricing when privately financed by non-cash collateral . The liability-side posting collateralmust weigh in haircuts stipulated in collateral agreements against those prevalent in the repo market and find the cheapest funded securities to post.
After revision: Cash collateral is perfect in that it provides simultaneous counterparty credit risk protection and derivatives funding. Securities are imperfect collateral, because of collateral segregation or differences in CSA haircuts and repo haircuts. Moreover, the collateral rate term structure is not observable in the repo market and find the cheapest funded securities to post.