A repurchase agreement, or repo, is a sale of securities for cash with a commitment to repurchase them at a specified price at a future date. The asset acts as collateral and mitigates the risk that the buy has on the seller. Repo can be used as a financing tool, yield enhancement or short covering for fixed-income market participants. A collateral swap is similar to a repo trade, but two parties exchange different types of collateral for a specified period.

As market condition changes, both parties in a repo/ collateral swap trade would require the securities used as collateral to be re-evaluated periodically to ensure their market value remains at least equal to the loan amount/ market value of the borrowed securities plus the margin percentage. If the market value falls below this amount, the borrowing party is required to deliver additional collateral to the lending party upon their request.

Client’s requests

A client of LoanClear is an investment bank involved in a collateral swap trade. The client (party A) wants to borrow some liquid fixed income securities from a counterparty (party B), and party A will post a basket of structured credit securities (RMBS and ABS) as the collateral. Party B requests to receive the valuations of the collateral daily. In addition, party B also requires that if the value of the loaned assets fall out of the trade notional range, a margin call should be issued, and the collateral should be adjusted.

LoanClear’s role

LoanClear provides the valuation of the collateral everyday following a pre-determined schedule. The RMSB and ABS securities in the collateral basket range from senior positions with more liquidity to mezzanine positions whose valuations are determined using our valuation model and market data. The valuations are delivered to both party A and party B, and Euroclear.

In addition, to accommodate party B’s request, LoanClear also takes on the role of the collateral administrator. On a daily basis, we compare the market value of the loaned assets against the trade notional range and send the margin call to both party A and B if the conditions are not met. The collateral management team at party A and B will send the instructions to Euroclear, and once the instructions are matched, LoanClear will update the trade notional range accordingly.

The impact

Leveraging our expertise on structured credit securities, LoanClear delivers accurate valuations to our client and their counter party in a timely manner. The flexibility of the team allows us to customize the services to meet specific requirements of the counterparty and facilitate the transaction for our client allowing them to reach their business goals.

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