Collateral Management

CHAPTER 42OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Collateral Substitution

This chapter describes the circumstances under which existing securities collateral is substituted with other collateral, and the process of achieving substitution. The subject of collateral substitution is introduced within Sub-section 22.8.14 ‘Collateral Substitution’ of Chapter 22 ‘OTC Derivatives and Collateral – Legal Protection – Credit Support Annex’; this chapter expands upon the concepts covered therein.

42.1 INTRODUCTION

In a situation in which securities (usually bond, unusually equity) collateral is being held by a collateral taker, the collateral giver may require return of that particular bond, in exchange for other collateral. The common term for such an exchange is ‘collateral substitution’ (see Figure 42.1).

FIGURE 42.1 Collateral substitution

Providing the replacement collateral is eligible under the CSA with the particular counterparty, the replacement collateral may be:

• replacement bond or equity versus substituted bond or equity
• replacement bond or equity versus substituted cash
• replacement cash versus substituted bond or equity
• replacement currency versus substituted currency.

Furthermore, bond collateral used as replacement ...