Rehypothecation of Collateral

The term Rehypothecation refers to the ability for a collateral receiver to reuse collateral provided by its counterparty. If the collateral is rehypothecable, then it can be redelivered to another counterparty to fulfill a margin obligation. If the collateral is not rehypothecable, then it cannot be reused and must remain in a specified account.

The setup of this functionality, requires two settings. One setting is a book attribute and the other is in the Details panel of the Margin Call Contract. Both the book and contract configurations need to be done for the Rehypothecation functionality to be enabled.

Warning messages appear if an attempt is made to receive into a book or pay from a book which is not eligible according to the Rehypothecation settings of the Contract.

 

1. Rehypothication Book Attributes

The book attribute Margin_Book_Type indicates whether a book can be used for rehypothecated assets. There are three options for this attribute. This attribute must be set in some way to enable the Rehypothecation functionality.

The Book window is displayed from Calypso Navigator by selecting, Configuration > Books & Bundles > Trading Book.

•

A selection of Rehypothecable means that rehypothecable collateral (collateral that is able to be reused on a different contract) can come into the book. The collateral that comes into the book will then be redelivered to another contract.

•

A selection of Non Rehypothecable means that only non-rehypothecable collateral can go into the book. The collateral will stay there until it is returned back to the counterparty.

•

A selection of PO Assets means that the collateral in the book belongs to the PO and the PO can do with it as it chooses.

 

If a book has no selection, it will function the same as a book with a PO Assets selection.

The Optimizer will treat the books with set attributes as either eligible or ineligible as appropriate.

 

2. Rehypothecation Setup in Margin Call Contract

The settings in the Parties panel of the margin call contract determine if the contract has the ability to receive and/or re-pledge collateral or if the contract is prohibited from doing so. The movements of the collateral are restricted to contracts that share the same Processing Org (PO).

 

Select the Enable Rehypothecation flag to enable the enable the Rehypothecation functionality in the Margin Call contract and to display the Rehypothecation related fields, Collateral Rehypothecation and Accept Rehypothecated Assets.

•

Collateral Rehypothecation: A selection in this field indicates that either the PO or the CP in the contract are permitted to rehypothecate collateral. The options are that BOTH cash and securities can be rehypothecated, CASH can be rehypothecated, SECURITY can be rehypothecated or no collateral from the contract can be rehypothecated (NONE).

•

Accept Rehypothecated Assets: A selection in this field indicates that either the PO or the CP in the contract accept rehypothecated collateral. The options are that BOTH cash and securities are accepted, only CASH is accepted, only securities (SECURITY) are accepted or no rehypothecated collateral is accepted (NONE).

 Ⓘ   On the PO side of the contract, the Accept Rehypothecated Assets flag is for information purposes only because it is not possible to govern what collateral the CP sends.

 Ⓘ   On the CP side of the contract, the Collateral Rehypothecation flag is for information purposes only because it is not possible to govern what CP does with their collateral.

 

NOTE: If the Rehypothecation Rules are set in the contract but none of the contract's Eligible Books do not have the appropriate MARGIN _BOOK_TYPE set, the Rehypothecation logic will not work and the user will not see any error messages.

Incoming cash and non-cash collateral against a non-rehypothecable contract where the allocation book has a null value for MARGIN _BOOK_TYPE BOOK ATTRIBUTE impacts non-rehypothecable balances.

In this scenario, delivery to PO and return to CP transfers from allocations for contracts which have the Enable Rehypothecation flag selected, and which have the Collateral Rehypothecation field set to NONE for the PO side of the Parties tab are impacted.