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Daylight Exposure/ Hold & Release

Daylight Exposure Definition

Daylight exposure is defined as the period in the day when one party to a trade has a temporary credit exposure to the other, due to one side of the trade having settled before the other. The period extends from the point of settlement of the first trade to the time of settlement of the other. (IBP-174 AGREED IN 2017)

Standard Securities Lending Structure

If the counterparty is acting as an agent lender, a loan of securities is generally only released once eligible collateral to the same value (including margin) has been provided. A counterparty may release a loan which is under-collateralised if the exposure is within their agreed exposure threshold or if this is within their risk parameters. This is known as the hold and release approach. Daylight exposure generally only impacts the collateral provider as a result. (IBP-175 AGREED IN 2017)

Markets and Time Zones

The specific market the collateral and loaned securities are settling in is a key factor in this. If the loan and collateral are in different markets and in different time zones, the period of time a counterparty may be exposed will increase. e.g. On a portfolio made up of Japanese collateral and US Loans, the Japanese Collateral would need to be pledged first thing in the morning to settle in the Japanese market, but the US Treasury loan could only be released when the US market opens later that day. (IBP-176 AGREED IN 2017)


Prepays are loans which are collateralised before value date. The reason this is done is: *To facilitate the settlement of a loan in a market that is in a different time zone. E.g. In some cases, a bank may not have the required presence in a particular time zone to facilitate the settlement of same day collateral. In this case, a prepay is the only solution in order to get the loan settled on value date OR If the market has an early cut-off that would make collateralisation of the loan same day impossible E.g. If a trader in the UK books a trade to settle the following day in Japan, the trader may book this as a prepay loan to ensure the trade is collateralised and released that day. If this was not done, collateral would need to be called the next morning and settled in the market, before the Japan market closes that day. There would be a very short timeframe for getting collateral to cover the loan in time for settlement same day. (IBP-177 AGREED IN 2017)

Common Approaches to Manage Daylight Exposure

If the counterparty is acting as lender, they will generally adopt a hold and release system. This means that the loan is only released when the relevant collateral is received. If hold and release is not used or if the counterparty is acting as borrower, the below approaches are generally used to reduce or remove daylight exposure. (IBP-178 AGREED IN 2017)

Use of a Tri-Party Agent

If a Triparty agent is used it allows for securities to be pledged which are not possible via bilateral means. E.g. Japanese collateral can be pledged outside of Japanese market hours as long as the security is held in the collateral giver's long box at Triparty. (IBP-179 AGREED IN 2017)

Shortened Turn Around Time of Margin Calls

In order to facilitate same day settlement, a timely margin call process needs to present to ensure the collateral and loan settle before market close. This can be achieved by the use of a triparty agent who can accommodate the collateralisation of loans in a very short period of time around the clock. (IBP-180 AGREED IN 2017)

All Banks Having Global Collateral and Loan Settlement Coverage

If a bank has a global presence in every time zone, there is a possibility the collateral can be received same day for all loans. This is dependent on the turnaround time of margin calls and also the securities which are being traded. (IBP-181 AGREED IN 2017)

All Trades Being Booked vs Cash

If a trade is booked as a DVP transaction (delivery of securities versus payment), the trade can be released immediately to the market, in the knowledge that the cash collateral will settle simultaneously with the loaned security. (IBP-182 AGREED IN 2017)

If a Loan is not Collateralized

If a loan is not collateralised, internal escalation procedures should be followed and the counterparty should be advised. The loan may be cancelled or re-agreed for a future date assuming this exposure falls outside the counterparty's risk and threshold parameters. (IBP-183 AGREED IN 2017)


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