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Limitations of Value Date of the Collateral in identifying netting set loans

Limitations of Value Date of the Collateral in identifying netting set loans


Status: For Review, Last Updated: 31/08/2023

Current validation rules for net exposure collateral use “Value Date” (2.13) of the loan and “Value Date of the Collateral” (2.74) to identify which loans fall within the net exposure netting-set.  However, this is too simplistic and does not take into account the different pre-pay collateralisation processes used in exposure management.

Within the loan books linked to net exposure collateral, individual positions may be collateralised on a value date (VD) or a VD -1 basis.  VD-1 is generally chosen where there is a disparity between the settlement market of the loan and that of the collateral (or indeed where the collateral is managed). 

For example, US Treasury collateral would need to be collected today in order for a Japanese loan to settle in APAC trading hours tomorrow.  However, the challenge is that the loan book between “Reporting Counterparty” (1.3) and “Other Counterparty” (1.11) often comprises assets settling in multiple locations and time-zones and will be split between VD and VD-1 collateral requirements, while the “Value Date of the Collateral” is a fixed value which must state the “latest value date contained in the netting set of SFTs….”.  This means that if even a single loan attracts collateral on a SD-1 basis, every loan sharing that value date is captured in that netting set on SD-1.

Example where Event Date = 03/10/22:

Loan 1:    10,000  Siemens  DE0007236101  €1,000,000   v/d 04/10/22  Collateral Date 04/10/22

Loan 2:  100,000  Vinci FR0000125486 € 8,200,000           v/d 04/10/22  Collateral Date 04/10/22

Loan 3:      1,000  Tokyo Electron JP3571400005 € 320,000  v/d 04/10/22   Collateral Date 03/10/22

In this example all three loans share the same value date (04/10/22), however only Loan 3 needs to be collateralised on 03/10/22 (VD-1).  On Event Date 03/10/22, the COLU report for this netting set would therefore be required to quote “04/10/22” as this is the “latest value date, suggesting enough collateral be collected to cover all three loans (€9,520,000). However, in reality the counterparty / agent would only collect €320,000 on 03/10/22 with the remainder collected prior to release of the loans on 04/10/22. This can create a massive disparity in what the COLU shows compared to what is expected

Best Practice:
The current validation rules use a single “Value Date of the Collateral” (2.74) field in the COLU report, to define which loans fall into scope of the netting set.

ISLA would like to propose that “Value Date of the Collateral” is added to the NEWT report so that it is the loan itself that defines the date of its inclusion into the netting set. This would remove any ambiguity and inaccuracy caused by the current netting logic. (SFTR-812)


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