Collateral pledging

In the case of a bonds borrowed/collateral pledged trade the institution lending the bonds does not want or need to receive cash against them, as it is already cash rich and would only have to reinvest any further cash generated. As such this transaction only occurs with special collateral. The dealer borrows the special bonds and pledges securities of similar quality and value (general collateral). The dealer builds in a fee payable to the lending institution as an incentive to do the trade. 

To illustrate a bond borrow/collateral pledged trade, suppose ABC Bank pic wishes to borrow DKK 300 million of the Danish government... 

Mortgage loan- A contract in which the borrower s property is pledged as collateral. It is repaid in installments. The mortgagor (buyer) promises to repay principal and interest, keep the home insured, pay all taxes and keep the property in good condition. 

In the US market there have been cases in which securities houses that went into bankruptcy and defaulted on loans were found to have pledged the same collateral for multiple HIC repo trades. Investors dealing in HIC repo must ensure ... 

Terms and Conditions of the bonds (the Ts Cs ) which are the most negotiated terms are usually those dealing with the negative pledge, which is a commitment by the issuer not to create a security interest senior to the bond over any collateral or not to issue debt senior to the bond, in the case of unsecured bonds description of the interest payable and redemption amount early redemptions (e.g., for tax reasons, puts and calls) withholding taxes and events of default. If the bond is part of a repackaging or a structured bond, the Ts Cs will also include a summary of the terms under which the security created for the benefit of the noteholders will be realised. 

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