Factored Bonds

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Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
How should participants report the value of factored bonds, if received as collateral, if the market value of the bond in the trading system accounts for the factor but the price does not?

Should the price and market value be reported taking into account factoring (as there is no field to report the factor), thus the quantity multiplied by the price will not equal market value for these bonds?

Best Practice:
Where the market quoted price of a bond is subject to an adjustment to calculate the cash proceeds to be paid at settlement, a "pool factor" adjustment in the case of certain types of asset-backed securities, often referred to as a balloon payment structure, then:

Field 2.87 (Price Per Unit) should be the adjusted price which, when multiplied by Field 2.83 (Collateral Quantity or Nominal Amount) gives the settlement proceeds of the security, which should be equal to Field 2.88 (Collateral Market Value), therefore;

(Price Per Unit) x (Collateral Quantity or Nominal Amount) = (Collateral Market Value)

ESMA Guidelines Reporting under Articles 4 and 12 SFTR: 06 January 2020

Section 5.4.5,5, Paragraph 357, page 128.

357. The definition of Price per unit (Field 2.87) specifies that the value reported should include the accrued interest for interest-bearing securities, i.e. the dirty price. (This paragraph also provides examples of how to report price (dirty market price) in table 87).

Collateral market value needs to accurately reflect the market fair value and should include any margin.

335. For SLB, the haircut or margin (Field 2.89) should only include haircuts that apply to the collateral side. Margin requirements will instead be captured through the collateral market value (Field 2.88) and the cash collateral amount (Field 2.76). Thus, the collateral market value and cash collateral amount should also be updated with any add-ons (such as loan mark-ups) that start applying in the course of the transaction. (SFTR-294)