To prepay is to collateralise a loan prior to the subsequent release of that loan instruction to market.
The prepay concept ensures that an asset lender has sufficient collateral prior loan settlement.
Prepays can either be done overnight, i.e., the day before loan settlement, but only if both parties agree to the resulting overnight exposure. Alternatively, a prepay may be agreed and processed on the same day as the loan settlement.
A prior day prepay is more likely to be agreed where there is a mismatch between the respective markets of collateral and loan, or where one party does not have a physical presence in the local time-zone.
Where collateral is managed via a triparty arrangement, which provides increase automation options, many market participants utilise vendor solutions which are able to trigger an automated loan instruction release on successful receipt of collateral.
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