Prepay Collateral

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Status: Under Review, Last Updated: 09/03/2021

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Prepay is the collateralisation of a loan prior to the loan's settlement. The receipt of collateral before loan settlement ensures that the lender covers any potential counterparty exposure(s) and that receipt typically triggering the release of any related loan instruction.

Collateral prepay may occur overnight, i.e., the day before loan settlement, but only if both parties agree to the resulting overnight exposure. It is also possible that parties may agree receipt of collateral on the same day as the loan settlement, providing collateral settles first.

Use of prior day prepay typically relates to mismatches between the respective settlement market of the collateral versus loan, or perhaps where one party does not have a physical presence in the local time-zone.

Where collateral is managed via a triparty arrangement, which may provide automation functionality, many market participants utilise vendor solutions to trigger an automated loan instruction release on successful receipt of collateral. (IBP-177)