When the total exposure covers several exposures in different currencies, the currency of sequence B is usually the reporting currency. When the total exposure covers one or more exposures in the same currency, either this currency or the reporting currency is used in sequence B.
The code identifying the exposure type or collateral reason in the user header of the message (block 3) must be identical to the code contained in field :22a::COLA//xxxx (Exposure Type Indicator) in sequence A of the message content (text block 4).
The collateral management process is initiated every time a new exposure is created, ie, when a new trade relationship is established. Also, membership of a clearing system usually requires the posting of collateral before clearing can start. This provides a guarantee that the member will honour its obligations.
The type of institutions involved in collateral management and who can send and/or receive collateral messages are:
clearing, netting, RTGS systems
central banks
institutional investors
fund managers
custodians
local authorities
corporates
banks
third party service providers
exchanges
Collateral can be claimed for the following reasons or products:
payments/settlements
credit lines
FX and derivatives trading
repo trading
securities lending and borrowing
cross-product, ie, combining collateral needs issued from different types of trades.
The types of collateral that can be proposed are:
securities
cash
letters of credit and bank guarantees (only for bilateral collateral management)
A collateral claim can be sent:
At initiation time, when the initiative is taken by the taker, a collateral claim is sent asking the giver to post collateral. The claim provides the exposure amount and the value of collateral required. The taker can also include the details of the collateral he wants.
When a new exposure is created by a variation in the value of the exposure, in the value of the collateral or in both values.
The taker will send a claim for additional collateral to be posted by the giver when his exposure vis-à-vis the giver increases, either because of additional exposure, increase of value of the existing exposure, decrease of value of the posted, or several of these occur.
The giver will send a collateral claim to the taker containing the details of the collateral to be returned, when the exposure from the taker vis-à-vis the giver decreases, either because of diminished exposure, decrease of value of the existing exposure, increase of value of the posted exposure or several of these occur.
When the exposure changes sides, ie, the 'former taker' is no longer exposed to the 'former giver' but the roles are reversed so that the 'former taker' becomes the new giver and the 'former giver' becomes the new taker. The (new) taker will send a claim for the return of his collateral. The same message will contain the details of the call for new collateral.
At termination time, when the exposure between the parties has disappeared completely. This happens for instance when a trade has reached maturity or when parties have decided to stop trading altogether or when an institution pulls out of a clearing system. The giver will send a message claiming all posted collateral.
Industry Requirements
Unless modified by the parties, the Credit Support Amount is generally the amount of Eligible Credit Support that the Secured Party is entitled to hold as of a particular Valuation Date.
The Credit Support Amount is usually defined as:
the Secured Party's Exposure; plus
the aggregate of all Independent Amounts applicable to the Pledgor, if any; minus
the aggregate of all Independent Amounts applicable to the Secured Party, if any, minus
the Pledgor's Unsecured Threshold.
The Credit Support Amount, however, is deemed to be zero whenever its calculation would yield a number less than zero.
An Independent Amount is an amount that may be used as an add-on to Exposure which can reflect, among other things, the volatility of a particular Transaction or credit concerns relating to one or both counterparties.
When an Independent Amount is applicable to a party, it increases the Credit Support Amount that is applicable when the other party is the Secured Party and decreases the Credit Support Amount that is applicable when that party is the Secured Party.
However, some parties may wish to modify the Credit Support Amount formula specified above to eliminate the subtraction of Independent Amounts applicable to the Secured Party. In this case, the Independent Amount represents the minimum Credit Support Amount when that party is a Credit Support Taker.
For example, Credit Support Amount may be defined as:
the Secured Party's Exposure; plus
the aggregate of all Independent Amounts applicable to the Pledgor, if any, minus
the Pledgor's Unsecured Threshold.
Provided that in the case where the sum of the Independent Amounts applicable to the Pledgor exceeds zero, the Credit Support Amount will not be less than the sum of all Independent Amounts applicable to the Pledgor. In all other cases, the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields an amount less than zero.
Hence, in the Collateral Messages, Independent Amounts should default to be treated as nettable unless being explicitly stated as being non-netted.
The Basic Amount with respect to any one party represents the minimum value of Posted Credit Support required at all times from a counterparty independently of any exposure.
Basic Amounts are not subject to any form of netting with Delivery or Return Amounts.
The Threshold generally represents the amount of unsecured risk (measured by the Secured Party's Exposure and the aggregate of any Independent Amounts due, if any) that a party is willing to tolerate without holding any Posted Credit Support provided by the other party.
Generally, under the standard definition of Credit Support Amount, the unsecured threshold is deducted from the current exposure in order to arrive at the Credit Support Amount required for a particular Valuation Date.
Alternatively, given the flexibility provided under ISDA documentation, the parties can agree to vary the Credit Support Amount definition so that when the exposure is greater than the threshold, the Credit Support Amount is calculated without any deduction of the unsecured Threshold, ie, Credit Support Amount = the entire Secured Party's exposure.
Such a threshold arrangement is commonly referred to by the market as a SECURED Threshold since, once breached, the whole exposure is effectively offset by Posted Credit Support.
EXAMPLE - reporting currency is USD
 Total Exposure Amount |
25,000,090 USD |
| Adjusted Exposure Amount (based on bilateral agreements) |
25,000,090 USD |
| Netted Independent Amount |
1,000,000 USD |
| Unsecured Threshold Amount |
2,000,000 USD |
| Subtotal |
24,000,090 USD |
| Basic Amount |
0 |
| Credit Support Amount |
24,000,090 USD |
| Value of Collateral Held |
15,384,615 USD |
| Delivery Amount |
8,615,475 USD |
| (Minimum Transfer Amount) |
(5,000,000) |
| (Rounding Integer Amount ) |
(250,000) |
| COLLATERAL CALL AMOUNT |
8,750,000 USD |
The items stated in italics are not present on the message as they can be deducted from the other amounts.
