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 the purpose of 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 {{{{{1}}}|Delivery Amount}} and to exclude any prior {{{{{1}}}|Return Amount}}, the transfer of which, in either case, has not yet been completed and for which the relevant {{{{{1}}}|Settlement Day}} falls on or after such {{{{{1}}}|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}}}|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.