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This graphic is explained in the accompanying text Collateral 

Use

If certain prerequisites are met, collateral is eligible as a means of mitigating credit risk and leads to a reduced capital requirement. This description outlines the special features to be considered when you create collateral.

Prerequisites

You have already created the following objects:

  Business partner in the role of counterparty

  Position for business partners

  Financial transaction that is to be collateralized

  Position for this financial transaction

  Business partner in the role of the protection seller

  If necessary, position for this business partner if this is not the same as the counterparty

  Settlement account for the collateral contract

  If a financial instrument or a physical asset is provided as the collateral, these objects must be created first.

Procedure

Pledges/Guarantees/Cash Collateral/Receivables

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  1.  Use template S40COLGARfor this type of collateralization. Enter the protection seller on the Partner Data tab page. You must enter the specific product type (500 for a guarantee, 520 for cash collateral, 530 for a receivable) for the collateral on the Credit Exposure tab page. You create the position in position class S024

  2.  Establish the link to the transaction to be collateralized by creating a subnode. You use template S40PORTIONfor the subnode. On the Object Relationships tab page, you can specify one or more transactions to which this collateral is to be assigned. Choose relationship category COLL2 – A Is Collateral for B if you are collateralizing a financial transaction. Choose relationship category COLL1 – A Is Collateral for B (PMD) if you are collateralizing a financial instrument or the relevant position master data object. Enter product type 545 (partial collateral contract) on the Credit Exposure tab page.

Mapping of Guarantees

This graphic is explained in the accompanying text

Collateralization by a Financial Instrument

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  1.  First create the financial instrument that is to be used as collateral. Templates S41SHARE (for stocks), S41BONDEX (for bonds), or S41CLN (for credit-linked notes) are available for this purpose.

  2.  Create the relevant position in position class S016 (for stocks), S015 (for bonds), or S021 (for CLN). Then create the position master data object with template S49FICOL for the position and with reference to the financial instrument. Enter product type 560 (pledge of financial collateral) on the Credit Exposure tab page.

  3.  Use template S40COLLATto create a collateral contract. This template differs from S40COLGAR in the Object Relationships tab page, on which you can link the actual collateral, in this case the pledged financial instrument. Choose PLPO (B is position pledged by A) as the relationship category and refer to the relevant position master data object. Enter product type 540 (collateral contract) on the Credit Exposure tab page.

  4.  Establish the link to the transaction to be collateralized by creating a subnode. You use template S40PORTIONfor the subnode. On the Object Relationships tab page, you can specify one or more transactions to which this collateral is to be assigned. Choose relationship category COLL2 – A Is Collateral for B if you are collateralizing a financial transaction. Choose relationship category COLL1 – A Is Collateral for B (PMD) if you are collateralizing a financial instrument or the relevant position master data object. Enter product type 545 (partial collateral contract) on the Credit Exposure tab page.

Mapping for Financial Collateral (Such as Bonds) for Financial Transactions

This graphic is explained in the accompanying text

 

Collateralization by a Physical Asset

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  1.  First create the asset that is to be used as collateral. Template S48PHYSASS is available for creating assets. You create the position in position class S024

  2.  Use template S40COLLATto create a collateral contract. This template differs from S40COLGAR in the Object Relationships tab page, on which you can link the actual collateral, in this case the physical asset. Choose “PHYS1 – B Is Physical Asset for A” as the relationship category. Enter product type 540 (collateral contract) on the Credit Exposure tab page.

  3.  Establish the link to the transaction to be collateralized by creating a subnode. You use template S40PORTIONfor the subnode. On the Object Relationships tab page, you can specify one or more transactions to which this collateral is to be assigned. Choose relationship category COLL2 – A Is Collateral for B if you are collateralizing a financial transaction. Choose relationship category COLL1 – A Is Collateral for B (PMD) if you are collateralizing a financial instrument or the relevant position master data object. You must enter product type 545 (partial collateral contract) on the Credit Exposure tab page.

Mapping for Physical Collateral That Collateralizes Financial Instruments (Here: Stock Position)

This graphic is explained in the accompanying text

 

Credit Derivatives as Collateral

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  1.  If credit derivatives, such as credit default swaps or total return swaps, are used to mitigate credit risk, use template S40CDS. On the Credit Exposure tab page choose product type 682 (CDS) or 683 (TRS) . You create the position in position class S024.

  2.  Establish the link to the transaction to be collateralized by creating a subnode. You use template S40PORTIONfor the subnode. On the Object Relationships tab page, you can specify one or more transactions to which this collateral is to be assigned. Choose relationship category CD07 (B is risk asset FT for credit derivative A) if you are collateralizing a financial transaction. Choose relationship category CD08 (B is risk asset FI for credit derivative A) if you are collateralizing a financial instrument or for the relevant position master data object. You must enter product type 545 (partial collateral contract) on the Credit Exposure tab page.

Mapping for Credit Default Swaps

This graphic is explained in the accompanying text

Counter-Guarantees

Counter-guarantees are mapped in the same way as guarantees. The counter-guarantee is used to guarantee a guarantee. Relationship category CUGO2 - A is Counter-Guarantee for B is used to identify the counter-guarantee. This relationship category links the portion of the counter-guarantee to the guarantee itself.

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  1.  Use template S40COLGAR for this type of collateralization. On the Partner Data tab page enter the protection seller. On the Credit Exposure tab page, enter product type 500 for the guarantee. You create the position in position class S024

  2.  Relationship category CUGO2 – A is counter-guarantee for B links the counter-guarantee to the guarantee. You process this relationship category in subnode S40PORTION.

Mapping for Counter-Guarantees

This graphic is explained in the accompanying text

 

Excurses: Provided Collateral

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Templates S40COLLAT and S40COLGAR are also used to map provided collateral. Provided collateral is mapped as an exposure, and not as a collateral instrument. The capital requirement is calculated for provided collateral. You use product type 240. You use object relationship PROCO – A is provided collateral for B“ to link template S40COLLAT or S40COLGAR to the derivative or the netting agreement. The portion is not used to map provided collateral, so you do not need to enter a value for it.

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  1.  Use template S40COLGAR for provided cash collateral. The amount of the collateral agreement, which you enter on the Key Figures tab page, represents the amount of the provided collateral.

  2.  Use template S40COLLAT for collateral provided in the form of securities. The market value of the securities, which you enter in position class S015 or S016, is the value of the provided collateral.

Mapping for Provided Collateral (Collateral in the Form of Securities)

This graphic is explained in the accompanying text