A collateral currency (also called a margin currency) is a currency that can be used as "collateral" for margin trading.
The collateral currency you hold does not have to match the margin pair you plan to trade. This is possible because when placing a leveraged trade you are borrowing funds for the entire value of that trade.
The collateral currencies on Kraken are:
As of the September 27th, 2018 trading engine update, collateral currencies used to open a margin position can no longer be exchanged for other currencies while the margin position is open.