What is collateral
Collateral refers to securities, financial instruments, or transfers of currency provided by a borrower to a lender, based to the value of securities loans. The type of collateral that may be used to secure securities loan transaction(s) are typically defined between counterparts within the master agreement governing their trading relationship.
Many factors determine what is considered acceptable collateral, including such measuring factors include issuing country, credit rating, ESG, liquidty, concentration factors or simply availability of assets. It should also be noted that some parties may agree to securities lending activity without collateral, however this practice is outside the structure of the ISLA standard master agreement.
Where collateral is passed between parties, it is standard practice to define a Margin and/or Haircut to ensure the overall value of collateral received is greater than the value of the lent securities. (IBP-162 UNDER ISLA REVIEW)
Haircut is the practice of reducing that market value applied to collateral, effectively taking more collateral that the underlying loan(s) it is collateralising (IBP-320 UNDER ISLA REVIEW)
Margin is the practice of increasing loan market value for cash collateralise transactions. This increases the collateralisation of the loan(s). (IBP-321 UNDER ISLA REVIEW)
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