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Collateral Management by Michael Simmons

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CHAPTER 43OTC Derivatives and Collateral – The Collateral Lifecycle – Throughout Lifetime of Trade – Income & Corporate Action Events

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.

This chapter builds upon the Income and Corporate Actions sub-sections within Chapter 22 ‘OTC Derivatives and Collateral – Legal Protection – Credit Support Annex’. The management of income events and corporate action events is a major topic in its own right; this chapter focuses on those subjects as they pertain to bond collateral. (For further details, please refer to this author’s book Corporate Actions: A Guide to Securities Event Management [ISBN: 0470870664].)

43.1 INTRODUCTION

Coupon payments are made by bond issuers to bondholders for most types of debt instrument (bonds), including fixed rate bonds, floating rate notes and convertible bonds. Coupon payments are not made on zero coupon bonds.

Coupon payments on certain types of bond are fully predictable in terms of the cash amount payable (based upon the coupon rate) and when payments are due (coupon payment dates), throughout the lifetime of the bond; both fixed rate bonds and convertible bonds fall within this category.

Floating rate notes (FRN) do not have a fixed rate of interest; instead their coupon rates are ...

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