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Collateral Methods

Collateral Methods

Cash Rebate

Where cash is provided as the collateral, there are two mechanisms for its transfer:

1) Delivery/Receipt Versus Payment (DVP or RVP) where the settlement of securities is instantaneous with the settlement of the cash.

2) Free Of Payment (FOP) also know as Delivery/Receipt Versus Payment (DVF/RVF) where the securities and cash are transferred reliant on the other being received. I.e., On a new loan, cash is delivered then securities released. On a closing loan, securities are return then cash is released.
Free of Payment (FOP) is the most common mechanism in EMEA markets, mostly in relation to equity markets.

In all cases, a rebate is provided by lender/cash receiver to borrower/cash provider based on a negotiated rate expressed a Basis Point – Benchmark. (See rebate calculation is the section [Accrued Income Calculation Method|

Cash Pool

Similar to a non-cash collateral mechanism, a cash pool is a single unlinked pool of cash between two parties to collateralise multiple stock loans.
It is recommended that the unlinked Cash Pool is used to collateralise multiple free of payment loans. The underlying loans should be flagged and identified as being versus Cash Pool so that the value of those loans, plus any margin, can be compared to the value of the Cash Pool. Any delta amounts should be moved daily, prior to cash cut-off, to clear any potential exposure.
Where multiple Cash Pool currencies are required, the underlying loan(s) should be booked with the same billing loan currency as the collateralising pool, and the value of each pool should be matched versus the value of those trades.
Cross currency exposure should be avoided or at least cleared the next business day if the cash cut-off time has been passed. (IBP-319 UNDER ISLA REVIEW)

Standard Cash Pool

A pooling of outstanding loan value resulting in a single collateral agreement and margin movement.

This approach is favoured by many firms for its process simplicity. (IBP-322 UNDER ISLA REVIEW)

EU Cash Pool

Each loan is collateralised on individual basis, with all loan being marked-to-market daily, the net of those movements resulting in the collateral movement.

As this requires more processing, it is considered by many firms as non-standard.

Non-Cash Bilateral

Collateral, in the form of assets, is delivered by the borrower directly to the lender's account. The market value of the collateral is typically higher than the market valuation of the lent assets.

When collateral is received under this type of arrangement, the received collateral may be pooled or managed in a segregated/separate account structure.

This type of activity may also be related to financing trades and/or be part of a negotiation where specific securities are provided as collateral versus the borrowed securities.

NOTE: The collateral taker may re-use the collateral (Rehypothecation) for other activities. Where the counterparts are governed by SFTR, there should be an exchange of documentation noting the re-use of collateral (See SFTR Article 15

Non-Cash Triparty Agent

Collateral, in the form of assets, is delivered by the borrower to a third party under a collateral arrangement with the lender.

Borrower and lender agree a daily collateralisation value which is then passed to a triparty agent. The triparty will then transfer the necessary asset into the lenders (collateral takers) collateral account at the triparty agent. Both parties are then advised of the successful transfer through an agreed mechanism/function.


Some counterparts lend without taking collateral, typcially where a simultaneous borrow occurs with the same counterpart effectively nets exposure.

As this activity is not within the scope of the standard master agreement, it is a not a recommended practice.

Central Counterpart (CCP)



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