Collateral cover

Collateral cover is now calculated with reference to market value as well as nominal value, enabling greater transparency and precision in the calculation of cover. Both these amendments benefit the Pfandbrief investor in the event of the insolvency of a mortgage bank, there would be no netting of derivatives, which would therefore continue to protect the cover pools and allow the banks to hedge against adverse market conditions that could cause their paper to suffer credit deterioration. 

Fig. 5. A. An example of an intraccllularly filled corticostriatal neuron of the type which provides a bilateral projection to the striatum. This neuron, in layer 5 of the medial agranular cortex (AGm), provides axon collaterals within AGm and into the adjacent lateral agranular cortex (AGI). A. The striatal axon collateral of the neuron is depicted in a sagittal section showing the multiple collateral branches covering a relatively large area of the striatum. Adapted from Cowan and Wilson 1994.

In certain jurisdictions, covered bondholders have some recourse to noneligible assets and, in the case of the special purpose affiliates, may also rely on some form of parental support for the issuer. For ABS/ MBS, in the event of insufficient proceeds from the pool assets to cover the claim, holders have no recourse above and beyond the collateral contained within the pools and the original ABS/MBS structure. 

We illustrate a stock loan where the transaction is stock-driven. Let us assume that a securities house has a requirement to borrow a UK gilt, the 5.75% 2009, for a one-week period. This is the stock from our earlier classic repo and sell/buyback examples. We presume the requirement is to cover a short position in the stock, although there are other reasons why the securities house may wish to borrow the stock. The bond that it is offering as collateral is another gilt, the 6.50% Treasury 2003. The stock lender, who we may assume is an institutional investor such as a pension fund, but may as likely be another securities house or a bank, requires a margin of 5% as well as a fee of 20 basis points. The transaction is summarised in Exhibit 10.12. 

A stock loan transaction in which the collateral is in the form of cash is similar in some ways to a classic repo trade. Here we compare the two transactions. Consider the following situation ABC is an entity, perhaps a bank or fund manager, that owns government bond G. Bank XYZ is a bank that requires bond G in order to deliver into a short sale that it has transacted in G. To temporarily acquire bond G to cover the short sale Bank XYZ may enter into either a stock loan or a classic repo. Exhibit 10.13 looks at the similarities between the two and the differences. 

Principal and interest are separated and the principal component may be used to redeem notes, to purchase additional collateral or returned to the mortgage originator depending on the type of structure involved. The nonprincipal amount, or revenue component, is used to pay any necessary fees and expenses for the transaction, the interest on the notes, and to cover losses. 

In European RMBS transactions, bonds are not generally written down when losses are incurred in the collateral pool. Instead, the losses are recorded in a principal deficiency ledger, which records the extent to which the balance outstanding on the notes exceeds the remaining assets. Usually, both excess spread and the reserve fund can be used to cover losses and so pay down the principal deficiency ledger. This mechanism is beneficial to holders of the lower-rated notes because the notes do not get written off immediately and any future excess spread will be used to cover the loss. 

The reserve fund consists of a cash amount that the issuer places on deposit at launch, which is available to cover any shortfalls in income and any principal losses during the life of a transaction. If the reserve fund is used, future excess spread will be retained until it is replenished up to its required balance. The required balance is usually a fixed monetary amount, but some transactions allow the reserve fund to amortise or even require it to increase depending on collateral performance. 

Many transactions include a liquidity facility. Although it does not provide protection against losses on the underlying collateral, it is available to cover temporary shortfalls in revenue receipts. 

Mortgage master trusts require the seller to maintain a certain minimum interest in the collateral pool held by the master trust. In credit card transactions this is used to absorb the monthly fluctuations in the balance outstanding on the credit cards and ensure there is always sufficient collateral to support the notes. In RMBS transactions the minimum seller s interest tends to be smaller as the mortgages have a more stable repayment profile, and this is primarily available to cover set-off risk in the event of originator insolvency. In existing transactions it is the minimum trust size rather than the minimum seller s share that has been the key constraint. 

If any losses are realised on loans in the collateral pool, they will be covered by trapping any excess cash flowing through the cash flow waterfall, so the size of excess spread relative to the losses being incurred is an important indication of the transaction s financial health. In the Holmes Financing master trust, excess spread is measured on a quarterly basis. Exhibit 11.17 shows it that has been averaging around 60 bps per year, massively exceeding the 0.5 bp loss rate. 

Strictly speaking, the FIAT 1 transaction does not generate excess spread. This explains the high level of credit enhancement from the unrated class M notes (usually, unrated tranches are either privately sold or kept as an equity tranche by the originator). On the closing date, an amount of notes was issued which was equal to the net present value of all future cash payments due from the collateral (as opposed to the principal balance of the collateral). The discount rate used was the fixed rate payable to the swap counterparty (swap rate plus coupon on the class A notes and all fees associated with the transaction). Structured this way, the receivables always yield the discount rate, leaving no excess spread in the transaction. However, losses on the FIAT 1 portfolio can be covered to a certain degree from interest collections because the structure provides for delinquent principal and defaults to be covered before interest is paid on the class M notes. 

Long-term rentals (LTR) have been used only in Portugal. In many aspects, they are similar to lease contracts. A major difference between an LTR and a lease contract is that in the case of the former, borrowers are required to make a cash collateral payment, which may be 30% of the related vehicle value. The cash collateral payment remains untapped over the term of the LTR if the borrower makes timely payments as agreed in the initial contract. In the case of nonpayments, the lender takes possession of the vehicle and the cash collateral payment is used to cover any losses the lender might incur if the price at which the vehicle was sold is below the final contract RV. LTR products have been part of the collateral for the LTR transactions, which were completed in 1999, 2000, 2001, and 2002 by Sofinloc. 

TR swaps may also be used for speculation. Bond traders who believe that a particular bond not currently on their books is about to decline in price have a couple of ways to profit from this view. One method is to sell the bond short and cover their position through a repo. The cash flow to the traders from this transaction consists of the coupon on the bond that they owe as a result of the short sale and, if the shorted bond falls in price as expected, the capital gain from the short sale plus the repo rate—say, LIBOR plus a spread. The danger in this transaction is that if the shorted bond must be covered through a repo at the special rate instead of the higher general collateral rate—the one applicable to Treasury securities— the traders will be funding it at a loss. The yield on the bond must also be lower than the repo rate. 

Yes. If employees are trained and designated as responsible for rendering first aid as part of their job duties, they are covered by the protections of the standard. However, OSHA will consider it a de minimis violation — a technical violation carrying no penalties — if employees, who administer first aid as a collateral duty to their routine work assignments, are not offered the pre-exposure hepatitis B vaccination, provided that a number of conditions are met. In these circumstances, no citations will be issued. 

The Dutch labor inspectorate (I-SZW) registers the casualties of serious occupational accidents. These accidents are serious in the sense that they lead to death, permanent injury or hospitahzation of the casualty. Traffic accidents on the road, in the air and on sea or waterways are not included in this registration. Furthermore accidents with dangerous substances (e.g. fireworks, asbestos, radioactive materials) and natural resources (gas) are excluded. All these excluded accidents are investigated by other specialized inspectorates. The I-SZW registration however covers the vast majority of serious occupational accidents in The Netherlands. From all registered casualties in 1999-2011 only the employed workers were selected. Self-employed individuals and collateral casualties (e.g. passers-by) were excluded from the analyses. 

Pool insurance an insurance policy provided by a composite insurance company to cover the risk of principal loss in the collateral pool. The claims paying rating of the insurance company is important in determining the overall rating of the issue. 

ABS performance is largely dependent on consumer credit performance, and so, typical ABS structures include trigger mechanisms (to accelerate amortization) and reserve accounts (to cover interest shortfalls) to safeguard against poor portfolio performance. Though there is no basic difference in terms of the essential structure between CDO and ABS/MBS, some differences arise by the very nature of the collateral and the motives of the issuer. Interestingly, whereas a CDO portfolio will have 100—200 loans, for example, ABS portfolios will often have... 

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