Guidance on stock lending—treatment of collateral
If a stock lending arrangement is entered into for a QFC retail scheme, the value of scheme property remains unchanged. The securities transferred cease to be part of the scheme property, but there is an obligation by the counterparty to transfer back the securities or equivalent securities. The independent entity will also receive collateral to set against the risk of default in transfer. The collateral is equally irrelevant to the valuation of the scheme property (because it is transferred against an obligation of equivalent value by way of re-transfer). This rule accordingly makes provision for the treatment of collateral in that context.
(1) For rule 7.6.2
(1) (c) (ii) (Stock lending requirements—QFC retail schemes), collateral is adequate
only if it is—
(a) transferred to the independent entity or its nominee or delegate, as appropriate; and
(b) at the time of the transfer to the independent entity, at least equal in value to the value of the securities transferred by the independent entity; and
(c) in the form of 1 or more of the following:
(ii) a certificate of deposit;
(iii) a letter of credit;
(iv) a readily realisable investment;
(v) commercial paper with no embedded derivative content.
(vi) units in an eligible money-market fund.
Note Collateral, readily realisable investment and eligible money-market fund are defined in the glossary.
(2) For rule 7.6.2
(1) (c) (iii), collateral is sufficiently immediate
(a) it is transferred before or at the time of the transfer of the securities by the independent entity; or
(b) the independent entity takes reasonable care to decide at the time mentioned in paragraph (a) that it will be transferred at the latest by the close of business on the day of the transfer.
(3) The independent entity must ensure that the value of the collateral is, at all times, at least equal to the value of the securities transferred by the independent entity.
(4) If the validity of any collateral expires or is about to expire, the independent entity's duty under subrule (3) is satisfied if the independent entity takes reasonable care to ensure that sufficient collateral will be transferred by close of business on the day of the expiry.
(5) Any agreement for transfer at a future date of securities, collateral, or the equivalent of either, under this rule may be regarded, for the purposes of valuation under division 8.2.B
(Valuation and pricing— QFC retail schemes), or this chapter, as an unconditional agreement for the sale or transfer of property, whether or not the property is part of the property of the scheme.
(6) Collateral transferred to the independent entity is part of the scheme property for these rules, except in the following respects:
(a) it must not be included in any valuation for division 8.2.B
or this chapter, because it is offset under subrule (5) by an obligation to transfer;
(b) it does not count as scheme property for any purpose of this chapter other than this rule.
(7) Subrules (5) and (6) (a) do not apply to any valuation of collateral itself for this rule.