Template:In-flight credit support: Difference between revisions
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====What about in-flight {{{{{1}}}prov|Credit Support}} deliveries?==== | ====What about in-flight {{{{{1}}}prov|Credit Support}} deliveries?==== | ||
So yesterday you met a [[margin call]] by delivering a [[bond]] the standard [[settlement cycle]] for which means it won’t arrive till the day after tomorrow. How is this “in-flight collateral” treated for the purpose of ''today’s'' [[margin call]]? It’s treated as if you have already been made. This is the significance of the parenthetical: “''(adjusted to include any prior {{{{{1}}}prov|Delivery Amount}} and to exclude any prior {{{{{1}}}prov|Return Amount}}, the transfer of which, in either case, has not yet been completed and for which the relevant {{{{{1}}}prov|Settlement Day}} falls on or after such {{{{{1}}}prov|Valuation Date}}).''” | So yesterday you met a [[margin call]] by delivering a [[bond]] the standard [[settlement cycle]] for which means it won’t arrive till the day after tomorrow. How is this “in-flight collateral” treated for the purpose of ''today’s'' [[margin call]]? It’s treated as if you have already been made. This is the significance of the parenthetical: | ||
{{quote|“''(adjusted to include any prior {{{{{1}}}prov|Delivery Amount}} and to exclude any prior {{{{{1}}}prov|Return Amount}}, the transfer of which, in either case, has not yet been completed and for which the relevant {{{{{1}}}prov|Settlement Day}} falls on or after such {{{{{1}}}prov|Valuation Date}}).''” }} | |||
However, if your [[counterparty]] fails in the meantime (before the [[bond]] has settled, and assuming ultimately it never does), it would count as an {{isdaprov|Unpaid Amount}} which would factor into your [[Close-out Amount - ISDA Provision|close-out calculation]]. | However, if your [[counterparty]] fails in the meantime (before the [[bond]] has settled, and assuming ultimately it never does), it would count as an {{isdaprov|Unpaid Amount}} which would factor into your [[Close-out Amount - ISDA Provision|close-out calculation]]. | ||
At first blush, this seems an odd result, but the risk is a time value risk associated with the collateral, not a counterparty risk per se. You accepted it when you agreed to {{{{{1}}}prov|Eligible Credit Support}} with a long a [[settlement cycle]] in the first place. If you don’t want that time-value risk, don’t agree to collateral with a long [[settlement cycle]]. | At first blush, this seems an odd result, but the risk is a time value risk associated with the collateral, not a counterparty risk per se. You accepted it when you agreed to {{{{{1}}}prov|Eligible Credit Support}} with a long a [[settlement cycle]] in the first place. If you don’t want that time-value risk, don’t agree to collateral with a long [[settlement cycle]]. | ||
Revision as of 13:05, 24 May 2021
What about in-flight {{{{{1}}}prov|Credit Support}} deliveries?
So yesterday you met a margin call by delivering a bond the standard settlement cycle for which means it won’t arrive till the day after tomorrow. How is this “in-flight collateral” treated for the purpose of today’s margin call? It’s treated as if you have already been made. This is the significance of the parenthetical:
“(adjusted to include any prior {{{{{1}}}prov|Delivery Amount}} and to exclude any prior {{{{{1}}}prov|Return Amount}}, the transfer of which, in either case, has not yet been completed and for which the relevant {{{{{1}}}prov|Settlement Day}} falls on or after such {{{{{1}}}prov|Valuation Date}}).”
However, if your counterparty fails in the meantime (before the bond has settled, and assuming ultimately it never does), it would count as an Unpaid Amount which would factor into your close-out calculation.
At first blush, this seems an odd result, but the risk is a time value risk associated with the collateral, not a counterparty risk per se. You accepted it when you agreed to {{{{{1}}}prov|Eligible Credit Support}} with a long a settlement cycle in the first place. If you don’t want that time-value risk, don’t agree to collateral with a long settlement cycle.