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Collateral Management by Michael Simmons

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

The figure shows the OTC derivative collateral lifecycle. It consists of a series of logical and sequential steps which should be experienced in order for a firm to process repo trades in a safe and secure fashion. The steps are as follows:
Step 1: Pre-Trading.
Step 2: Trading.
Step 3: Post-Trading.
Step 4: Throughout Lifetime of Trade. 
Step 5: Trade Termination.
This stage of diagram depicts the Throughout Lifetime of Trade.

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).

The figure shows the collateral substitution. The figure depicts that securities (usually bond and equity) collateral is being held by a collateral taker 
(Part B), and the collateral giver (Party A) may require return of that particular bond, in exchange for other collateral.

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 ...

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