Market conditions that impact derivative values move every day, and the bank is both posting and receiving collateral through margin calls. Under stressed market conditions those moves can be much larger than the bank experiences day to day, and the bank has to hold liquidity against them. The adverse market conditions are captured in the LCR and do not impact the NSFR.

The credit support annex (CSA) can carry terms set against the external credit rating of the bank, and those terms are the downgrade triggers. They require the bank to post more collateral, or to pay cash, if the bank is downgraded. This is a contingent obligation, and the bank recognises the outflow in the LCR.

In derivative transactions the credit support annex (CSA) sets the terms of the collateral, and it can give the counterparty the right to substitute the collateral it has posted without the consent of the bank. The presence of such a right requires the bank to capture an outflow in the LCR. This notebook covers the net asset position, where the bank receives variation margin (VM) and the counterparty holds the substitution right over it.

The previous notebook looked at the case where the bank receives variation margin (VM) on the derivative trades. The credit support annex (CSA) requires the exchange of VM in both directions, and the VM amount is offset against the MTM to arrive at the net position for the netting set. This notebook covers the net liability position, where the bank posts VM. The bank also posts initial margin (IM), which is a separate posting under the CSA and is not offset against the MTM.

The previous notebooks looked at the cases where no collateral was exchanged on the derivative trades. Banks sign a credit support annex (CSA) agreement with counterparties that requires an exchange of variation margin (VM) on the derivative trades. The VM amount is offset against the MTM to arrive at the net position for the netting set. This notebook covers the net asset position, where the bank receives VM.

Banks have multiple derivative trades with various counterparties. These contractual derivatives are captured in both the LCR and the NSFR, but there are differences in how derivatives impact liquidity under each. In summary, the LCR captures the exchange of payments that occurs within the next thirty days on the derivative contracts, while the NSFR looks at the MTM of the derivatives. This notebook discusses derivative trades with a net liability position and where no collat

Banks have multiple derivative trades with various counterparties. These contractual derivatives are captured in both the LCR and the NSFR, but there are differences in how derivatives impact liquidity under each. In summary, the LCR captures the exchange of payments that occurs within the next thirty days on the derivative contracts, while the NSFR looks at the MTM of the derivatives. This notebook discusses derivative trades with a net asset position and where no collateral

Derivatives are captured in both the LCR and the NSFR, and the two ratios measure the same book in different ways. The LCR captures what the bank exchanges with its counterparties over the next thirty days, which is the payments on the trades and the collateral called against them. The NSFR captures the MTM, which is what the bank would receive or pay to close the trades out today.

Part 1 holds the sourcing constant and varies the collateral. A client long covers the client short in both scenarios, and the security is Level 2B in the first and non-liquid in the second. The collateral quality determines which rules report the trade, and both the outflow and the inflow carry 50% either way. Part 2 holds the collateral constant and varies the sourcing. The security is Level 2B in all three scenarios, and it comes from a stock borrow, a firm long or a clie

Covering the short from another client's account is an internalisation, and the security the long client holds is non-liquid. The rule written for internalisation applies where the assets used do not qualify as liquid assets, so the prime broker reports a contingent obligation measured on the market value of the security it delivered. The obligation stands against the risk that the prime broker cannot find that security again if the long client withdraws it.

When a client wants to sell a security it does not own, the prime broker facilitates the trade and sources the security. Here the prime broker sources it from inside its own client business. Another client holds the security in a long position financed by a margin loan, and the terms of that loan make the security available to the prime broker, which delivers it to the short client's account to be sold in the market. Because the client sold a security it does not own, the pos

When a client wants to sell a security it does not own, the prime broker facilitates the trade and sources the security. The prime broker buys the securities in the open market and owns them, then lends them to the client's account to be sold in the market. Because the client sold a security it does not own, the position is called a "Client Short". The client leaves the proceeds of the sale with the prime broker and posts margin on top. Both balances are held under a title t

When a client wants to sell a security it does not own, the prime broker facilitates the trade and sources the security. The prime broker borrows the securities from a stock lender, posts cash collateral against them, and passes them to the client's account to be sold in the market. Because the client sold a security it does not own, the position is called a "Client Short".

When a client wants to purchase a security, the prime broker facilitates the trade and funds part of it. The client puts up part of the purchase price as margin and the prime broker lends it the rest, and the combined amount buys the securities. The position is held in the client's account at the broker and it secures the loan, and because the client is long the security the position is called a "Client Long". The loan the broker extends against it is the "Margin Loan", and i

Prime Brokerage covers the services the prime broker provides to its clients, which are custody, securities lending, financing, and trade execution. The client is a hedge fund and therefore a financial customer. When the client wants to purchase a security or to sell one it does not own, the prime broker facilitates the trade, and it finances the position or sources the security.

Collateral substitution is a right held by the counterparty that posted the collateral, allowing it to withdraw what it delivered and replace it with another asset without the consent of the party holding it. Nothing is exchanged when the trade is booked and the right may never be exercised. The presence of such a right should still be reflected in the liquidity calculations.

Where the three trades exchange collateral of the same market value, raise the same cash and run the repo inside the 30 day horizon, they produce the same liquidity impact in the LCR and the same impact in the NSFR. What differs is where that impact is reported. On the upgrade the outflow sits on the collateral swap, on the downgrade both the collateral swap and the repo contribute, and on the like for like the outflow comes from the repo leg. Change one of those inputs and t

A collateral swap is a trade where the broker and the stock lender exchange securities. These trades do not involve a cash leg. The liquidity treatment can be an upgrade trade, a downgrade trade or a like for like trade. This notebook covers the like for like trade.

A collateral swap is a trade where the broker and the stock lender exchange securities. These trades do not involve a cash leg. The liquidity treatment can be an upgrade trade, a downgrade trade or a like for like trade. This notebook covers the downgrade trade.

A collateral swap is a trade where the broker and the stock lender exchange securities. These trades do not involve a cash leg. The liquidity treatment can be an upgrade trade, a downgrade trade or a like for like trade. This notebook covers the upgrade trade.