Daily Collateral Process & Requirements

Initial Collateral Calls

Status: Under Review, Last Updated: 12/02/2021

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Counterparties should address exposure capture as early as possible to ensure that the proposal, agreement and resulting collateral instruction is completed in good time.

Please refer to IBP-189 for guide times.

Both counterparties should address any changes to exposure valuations as soon as is practicably possible. (IBP-168)

Bilateral Arrangements

Status: Under Review, Last Updated: 28/01/2022

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Collateral and subsequent trade leg should be agreed, instructed and delivered prior to the Delivery Versus Payment (DVP) cut-off of the related settlement market. The DVP deadline has been chosen for cut-off, being earlier than the Free of Payment (FOP) deadline. This earlier deadline then allows onward deliveries and sufficient tolerance to avoid any mandatory penalty or buy-in.

Ad-hoc or late agreement will be done on a best-efforts basis. (IBP-169)

Bilateral Collateral Substitutions

Status: Under Review, Last Updated: 23/02/2021

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It is recommended that the counterparties agree collateral substitutions in accordance with their collateral schedule(s) and in as timely a manner as possible, but no later than an hour before the earliest DVP market deadline. This earlier deadline then allows onward deliveries and sufficient tolerance to avoid any mandatory penalty or buy-in.

Collateral delivered as a substitution for collateral being withdrawn must adhere to the agreed eligibility schedule and be of sufficient value. (IBP-170)

Prepay Collateral

Status: Under Review, Last Updated: 09/03/2021

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Prepay is the collateralisation of a loan prior to the loan's settlement. The receipt of collateral before loan settlement ensures that the lender covers any potential counterparty exposure(s) and that receipt typically triggering the release of any related loan instruction.

Collateral prepay may occur overnight, i.e., the day before loan settlement, but only if both parties agree to the resulting overnight exposure. It is also possible that parties may agree receipt of collateral on the same day as the loan settlement, providing collateral settles first.

Use of prior day prepay typically relates to mismatches between the respective settlement market of the collateral versus loan, or perhaps where one party does not have a physical presence in the local time-zone.

Where collateral is managed via a triparty arrangement, which may provide automation functionality, many market participants utilise vendor solutions to trigger an automated loan instruction release on successful receipt of collateral. (IBP-177)

Instruction Release for Loans vs Cash

Status: Under Review, Last Updated: 09/03/2021

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Where a trade is booked as a delivery-versus-payment (DVP) transaction, the trade instruction should be released immediately to the market. No holding of the instruction is required as the cash collateral will settle simultaneously with the loaned security.

For securities loans settled via a DVP instruction, where that cash represents the final collateral, the loan should be booked as a cash rebate transaction.

The ISLA Best Practice group discussed the management of cash pool transactions, where a securities loan is booked versus a fee and the cash element being a separate cash flow. It was agreed that DVP should not be used for cash pool trades due to the additional maintenance requirements and inherent risk of multiple cash movements. (IBP-182)

Loan is not Collateralized

Status: Under Review, Last Updated: 09/03/2021

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If a loan is not collateralised, internal escalation procedures should be followed and the counterparty should be advised. The loan may be cancelled or re-agreed for a future date assuming this exposure falls outside the counterparty's risk and threshold parameters. (IBP-183)