Collateralisation of Net Exposure

Field 2.73 | Matching Date: 2020-04-01 | Tolerance: None | Agent Lender Data Provision: No>

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

Field 2.73 | Matching Date: 2020-04-01 | Tolerance: None | Agent Lender Data Provision: No

Description:
Indicates whether the collateral has been provided for a net exposure, rather than for a single transaction.

Best Practice:
If Field 2.72 (Uncollateralised Securities Lending [SL] Flag) is populated with "FALSE" this field must be populated and contain one of the values: "TRUE" or "FALSE", else the field should be left blank.

Where the collateral provider pledges collateral on a net-asset basis or specific collateral is unknown at the point of execution, then "TRUE" should be reported in all cases; therefore:

Cash Rebate SFTs
= "FALSE"

Cash Pool SFTs
="TRUE"

Non-Cash SFTs
="TRUE"

Notes with regards to the logic;

• Cash Rebate: When you collateralise/margin a cash rebate trade, this is always done on a trade level basis. When you run your exposure figures, if you are short, you will contact the counterparty and agree a new loan price for the trade. You will then calculate how much cash will be received. You may perform a cash mark on several trades and decide to receive one lump sum, however you agree a new price for each trade individually, hence the trades are being margined at a trade level. Hence 2.73 = "FALSE".

• Cash Pool: When you collateralise/margin a cash pool trade, this is done on a net exposure basis. When you run your exposures figures, if you are short, you will contact the counterparty and agree to receive one lump sum which will collateralise all of the cash pool trades. The cash pool is marked, not the price on the individual trades. Hence 2.73 = "TRUE".

• Non-cash trades: Are the same as cash pool trades being TRUE except where on occasions, for non-cash SFTs, the collateral taker knows the specific ISIN to be received at the point of trading in a process often referred to as Bonds Borrowed. These are typically a one-for-one swap of Euro or Government Bonds at the (I)CSDs that may or may not be collateralised intraday with cash, therefore DVP or FOP. Any cash allocated would ordinarily net to zero once both legs of the transaction has settled.

Due to a known issue with Fields 2.58 (Fixed Rebate Rate) and 2.59 (Floating Rebate Rate) which has a conditional dependency on this Field 2.73 (Collateralisation of Net Exposure), which makes one of them mandatory if the value is "FALSE", the unanimous decision was to always mark non-cash and cash pool SFTs as net exposure equal to "TRUE".

This decision was made to circumvent the alternative which would otherwise see users mandatorily having to provide a rebate rate for a non-cash collateral SFT, which of course they cannot. An action that would see their reported message rejected at the TR.

This effectively, is an industry agreed solution for a known issue, which both ESMA and the NCAs are aware of. (SFTR-93)