Unsecured CollateralUncollateralised securities
Uncovered bond Explanation of the unsecured bond Explanation of the unsecured bond Explanation of the unsecured bond Explanation of the unsecured bond
Uncovered loan. Unless a loan is secured by collateral or by collateral of some kind, such as a mortgages, which can be used to pay back to the borrower if the borrower falls into arrears, the loan is considered unsecured. Most unsecured debt, however, represents a small counterparty credit exposure as the issuers are generally solid financial institutions.
Uncovered loans are also referred to as debt securities.
10. Whats a "repledge" of collateral?
Re-pledging " of securities? of securities which undertake a pledging of the same securities to a third part. Re-pledging is sometimes referred to as "reuse" in the derivative markets. Re-use', however, is used in the repos to refer to the complete selling of collateral by the purchaser to a third part.
An important difference in law exists between repledging on the one side and the use of collateral in the (non-American) repos on the other side. The ownership of the securities shall remain with the guarantor in the event of pledging. Where the collateral provider gives the collateral seeker a right of pledging, the collateral provider shall remain the proprietor, but only until the collateral seeker has exercised his right.
In exercising the right of pledge, the collateral provider shall lose ownership of the collateral assigned to the third person to whom the collateral was pledged. Instead, the collateral provider receives a right to surrender negotiable collateral which is unsecured (although the collateral provider has probably obtained funds as consideration for granting the right to repledge to the collateral taker and, in the case of bankruptcy of the collateral provider, the collateral provider usually has a right to offset all reciprocal liabilities to the collateral taker).
At the beginning of a repos deal, the purchaser becomes the security holder and can decide on the security when and how he wants. The rehabilitation financing is used extensively by Prime Brokers, who are participating in the hedging of derivative business with hedgefonds. It was a foreign legal term but was officially adopted in 2003 with the EU Financial Collateral Directive.
The rehab lending is considered by prime-brokers to be crucial for the profitability of their businesses. As consideration for the right to repledge, they can provide customers with more favourable financing. After the failure of Lehman Brothers in September 2008, it was determined that the operating processes of this company were insufficient for the management of hypothecated asset values. In addition, some customers may not have fully grasped the type of repledging.
Re-pledging regulations vary from country to country. The Federal Reserve Regulatory T and SEC Rule 15c3-3 in the USA restrict the amount of a client's asset that a prime broker can mortgage back to 140% of the client's liabilities to the prime broker. 15c3-3 is the rule that a mortgage can be used to refinance a client's asset.