Template:In-flight credit support

What about in-flight 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 today’s margin call?

It’s treated as if you have already made it. This is the significance of the parenthetical:

“(adjusted to include any prior Delivery Amount and to exclude any prior Return Amount, the transfer of which, in either case, has not yet been completed and for which the relevant Settlement Day falls on or after such 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, this seems odd, 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 Eligible Credit Support with a long 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.