Over the past few months I have been observing a wide range in broker GBP swaptions quotes. One thing I notice is that the brokers have different currencies specified in the CSA agreements we have with them, and I am investigating whether this could be resulting in a pricing adjustment. For example, if I buy an out of the money payer, then there will be an expectation that over the life of the option I will be receiving collateral denominated in whatever currency is agreed in the CSA. If I have USD collateral with one broker, and JPY with another, then presumably I'd expect a lower quote for the JPY payer, as I'd have expected xccy basis swap hedging costs to factor in. Else I could book back to back swaptions at same price and just earn the free USD/JPY xccy basis spread.Is anyone aware of this pricing effect?Thanks

I don't know about the Swaption case in particular. I know that there is a lot of fun and games that can go on with colleteral (viz a US bank once changed all their trades with Counterparties as they changed their view on how collateral should be managed and booked in their firm) and also I know that in some cases you are better booking trades with the clearing house to get a return on the cash lodged there in terms of margin.In your case why would you not access the money market and execute the trade without all the costs of the swaption? Or is the basis larger than the MM basis?Also you have got to be careful: Collateral in large firms is managed as a bucket, and you will get passed back a collateral charge/benefit that has been invented on the back of a fag packet. You might not always get what you expect back.

Thanks Rmax

Yes, this where all the fun is at these days... It's also the reason why the mkt has gone to fwd premium.

Good point as usual.