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Collateral Fails Management

Collateral Fails Management

Collateral fails may occur due to wrong instructions or short positions either on
(a) the commencement of the Loan
(b) in case of a substitution of Collateral or with regard to Margin Maintenance
(c) on the termination of the Loan.

In all cases, a failure to deliver or re-deliver Collateral should not be considered as cover of exposure for the receiving party.

Overnight exposure should be avoided where possible. (IBP-192 UNDER ISLA REVIEW)

On the Commencement of the Loan

Typically a collateral giver will undertake to deliver to, or deposit, collateral prior to close-of-business on an agreed date in order to cover any new loan. That agreed date may be the loan settlement date or prior date depending on type or location of the loan security.

If a collateral fails to be delivered, counterparts may agree to the provision of alternative collateral within standard market deadlines, dependant on the type of collateral.

If market deadlines for securities collateral are passed, parties should avoid any overnight exposure by holding back settlement of new loans. (IBP-193 UNDER ISLA REVIEW)

During the Term of the Loan

Throughout the life of a LOAN vs. Non-Cash collateral, it is accepted that a borrower must collateralize a pending/settled position with appropriate, eligible assets that meet the parameters of the associated collateral schedule AND collateralize the loan to the required margin level.

In situations where a loan or loan book is under-collateralized, based on last available COB pricing, the collateral taker should initiate a request or a call for additional collateral to be agreed, instructed and settled that day.

Start-of-day collateral requests or calls should be initiated as early as possible in the business day - no earlier than 9am (UK), no later than 11am (UK). Additional intraday and EOD movements should be supported on- demand - but no later than 6pm (UK).

If a Borrower needs to recall a Non-Cash collateral position, then a substitution must be arranged and settled before the recalled security can be released.

All Non-Cash collateral activity should be proactively monitored by both parties and should settle on the same day it is agreed and instructed.
If a collateral movement is failing, then there may be a need to cancel/renegotiate/replace/reinstruct the collateral.
Failure to settle collateral 'on-time' may lead to business escalation AND a delay in new loan activity being committed to market.

End of Day exposure may result in regulatory communication. (IBP-194 UNDER ISLA REVIEW)

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