Collateral Margin/Haircut Definitions & Calculations

Collateral Methods

Status: Under Review, Last Updated: 15/01/2021

Cash Rebate
Where cash is provided as the collateral, there are two mechanisms for its transfer:

1) Delivery/Receipt Versus Payment (DVP or RVP) where the settlement of securities is simultaneous with the settlement of the cash.

2) Free Of Payment (FOP) also known as Delivery Versus Free (DVF) where the securities and collateral are transferred independently. On a closing loan, securities are returned which initiate a new collateral agreement.

Free of Payment (FOP) is the most common mechanism in EMEA markets, mostly in relation to equity securities lending.

In all cases, a rebate is provided by lender/cash receiver to borrower/cash provider based on a negotiated rate expressed in Basis Points (BPW) plus/minus a Benchmark rate. (See rebate calculation in the section Accrued Income Calculation Method (IBP-318)

Collateral Methods

Status: Under Review, Last Updated: 15/01/2021

Cash Pool
Similar to a non-cash collateral mechanism, a cash pool is a single unlinked pool of cash between two parties to collateralise multiple stock loans.

It is recommended that the unlinked Cash Pool is used to collateralise multiple free of payment loans. The underlying loans should be flagged and identified as being versus Cash Pool so that the value of those loans, plus any margin, can be compared to the value of the Cash Pool. Any delta amounts should be moved daily, prior to cash cut-off, to clear any potential exposure.

Where multiple Cash Pool currencies are required, the underlying loan(s) should be booked with the same billing loan currency as the collateralising pool, and the value of each pool should be matched versus the value of those trades.
Cross currency exposure should be avoided or at least cleared the next business day if the cash cut-off time has been passed. (IBP-319)

Collateral Methods

Status: Under Review, Last Updated: 15/01/2021

Standard Cash Pool
A pooling of outstanding loan value resulting in a single collateral agreement and margin movement.

This approach is favoured by many firms for its process simplicity. (IBP-322)

Collateral Methods

Status: Under Review, Last Updated: 15/01/2021

EU Cash Pool
Each loan is collateralised on individual basis, with all loan being marked-to-market daily, the net of those movements resulting in the collateral movement.

As this requires more processing, it is considered by many firms as non-standard.
(IBP-323)

Collateral Methods

Status: Under Review, Last Updated: 15/01/2021

Non-Cash Bilateral
Collateral, in the form of securities/assets, is delivered by the borrower directly to the lender's account. The market value of the collateral is typically higher than the market valuation of the lent securities/assets.

When collateral is received under this type of arrangement, note that received collateral may be pooled or managed in a segregated/separate account structure.

This type of activity may also be related or similar to financing trades and/or be part of a negotiation where specific securities are provided as collateral versus the borrowed securities.

NOTE: The collateral taker may re-use the collateral (Rehypothecation) for other activities. Where the counterparts are governed by SFTR, there should be an exchange of documentation noting the re-use of collateral (See SFTR Article 15) (IBP-324)

Collateral Method- Receiver validating recd coll.

Status: Under Review, Last Updated: 15/01/2021

Non-Cash Triparty Agent
Collateral, in the form of securities/assets, is delivered by the borrower to a third party under a collateral arrangement with the lender.

Borrower and lender agree a daily collateralisation Required Value (RQV) which is then passed to a triparty agent. The triparty agent will then allocate the necessary appropriate securities/assets to the lenders (collateral takers) collateral account at the triparty agent. Both parties are then advised of the successful transfer through an agreed mechanism/function.

The collateral receiver should independently validate that the collateral is correctly valued and defined as eligible according to a pre-defined collateral schedule. Collateral giver should also validate/reconcile the valuation applied. (IBP-325)

Collateral Method outside GMSLA scope

Status: Under Review, Last Updated: 15/01/2021

Uncollateralised
Some counterparts lend without taking collateral, typically where a simultaneous borrow occurs with the same counterpart effectively nets exposure.

As this activity is not within the scope of the standard master agreement, it is a not a recommended practice. (IBP-326)

Calculation of Margin

Status: Under Review, Last Updated: 14/12/2020

Exposure Calculation
The calculation of exposure should follow the below formula:

If Collateral Type = Cash then
Loan Value = ((LoanQuantity * SecurityPrice)*Margin%) * FXRate)
If Collateral Type = Non-Cash then
Exposure = Loan Value - ((CollateralQuantity*SecurityPrice)Haircut% FXRate)

Note:
(a) Margin% may be dependent on factors such as asset class, credit rating, liquidity, loan ccy vs cash collateral currency. Margin% must be bilateral agreed.
(b) Margin% is not usually applied to non-cash collateralised transactions. However, it may be used in cases where Tri-Party agent applies Haircut% to collateral and cannot know factors such as cross currency exposure between loan & collateral
(c) FXRate should be previous close-of-business see Asset Price
(d) Please note the formula for billing IBP-157 (IBP-163)

Issuing Margin Call

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

**
Vendor systems should be used to ensure exposure, price, quantity and margins are in line.

Each counterparty should agree the margin call bilaterally, prior to collateral instruction being issued.

In the case of a Margin Call Discrepancy refer to practice IBP-195 (IBP-166)

Margin Deviations

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

**
In certain scenarios, events may occur that require margins to be re-agreed or altered.

It should be noted that any change of collateral or amendment to the schedule governing accepted collateral should be bilaterally agreed, with sufficient notice to implement any change. (IBP-164)