This is a very specialised subject, for which I apologise in advance. I hope to receive some feedback nevertheless!

In Europe there was an exemption for pension funds from the central clearing obligation but this is only temporary. Pension funds are historically investors that have a unidirectional portfolio (mostly buy and hold investment) and are fully invested.

If they would go to central clearing the central clearing party will demand that any variation margin (another name for collateral) is posted in cash and won't allow the pension funds to post bonds (that they already own) as variation margin for a variety of reasons.

Pension funds themselves are not to keen on posting variation margin in bonds either, because when they do, they'd want an equivalent bond back and not end up receiving French bonds back when the market moves in their favour when they originally posted German bonds.

Another option is for the pension funds to enter into a repurchase agreement with another counterparty. The bank temporarily sells a bond, receives cash and buys back the bond at an agreed end date. He will pay a repurchase fee for this and basically is a secured loan (the other party holds the bond as collateral). That way the pension funds receives cash, which it can post as variation margin.

This works fine in normal markets but not in stressed markets. The risk that they cannot transform their bonds, is what is called the transformation risk.

So, one solution I was now thinking of is the following and I wonder whether it will work:

What if the CCP creates an actively managed ETF with a certain basket of high-quality bonds (that all pension funds have) and simultaneously forces its clearing members to accept ETF shares as variation margin?

The pension funds deliver a creation basket and receive, in return, ETF-shares. They continue to have a right to all the returns of the underlying basket they delivered via the ETF-shares minus the creation fee and any adminstration fees the ETF charges. When pension funds are confronted with a margin call, they deliver ETF-shares instead of cash. This should start acting as a standardised non-cash variation margin within this CCP - almost as good as money - as the fund is backed up by a diversified portfolio of high-grade bonds. Presumably, the end user ultimately entitled to the variation margin, won't mind receiving it as collateral because it's freely tradeable (for cash) or could be redeemed (for bonds).

The pension fund won't have to worry he won't receive equivalent securities back any more because it's ETF-shares all around.

Basically, I'm suggesting to create a liquid alternative to cash in the form of ETF securities but it seems as such a simple solution that I suspect I'm missing something because brighter minds in the industry haven't thought of it yet.