The ability to capture value through recognition of differential discounting (DD) and eligible collateral assets — first identified during the transition from LIBOR to OIS discounting — has been known for over a decade. Around 2009–10, one major Wall Street bank reportedly generated a substantial share of its FICC revenue by exploiting this effect. As the market evolved, most dealers upgraded their systems to eliminate this arbitrage internally, crystallising costs for those that were slower to adapt.

Even today, however, the process is not fully efficient. Trades executed “given-in” under Clearing Agreements are typically processed through post-trade approval systems that are DD-agnostic, leaving persistent arbitrage gaps. When a client executes a trade, the executing broker (EB) prices it using discount curves aligned with its own clearing relationship — curves that often differ from those used by the clearing agent (CA) in its valuation of the same position.

The result is that trades can be priced on inconsistent discount curves, creating systematic valuation mismatches. For trades with large funding deltas, this can produce backwardation opportunities, where clients can extract value by recognising and exploiting how discounting conventions vary across market participants.