3.1.5 Collateral Revaluation of Market Based Securities

This topic provides information on Collateral Revaluation of Market Based Securities.

The assets that are offered as collateral generally back the credit facilities that the bank grants a customer. Your customers can offer ‘marketable securities’ as collateral. As Marketable Securities are by nature given to fluctuations based on the forces of short-term demand and supply, their value also tends to fluctuate.

A rise or fall in the market value of a security, affects its collateral value. Therefore, the value of a collateral should reflect the changes in the value of the securities backing it.

Revaluation of a Collateral is caused only if the value of the marketable security that backs the collateral, fluctuates beyond the price sensitivity you prescribed for the security in the Securities Maintenance screen. Based on these changes, the collateral contribution to the overall credit limit of the customer increases or decreases. Hence the availability under the line also changes.

After you authorize the price change:

  • The price change is compared with the last price stored in the Collateral Maintenance screen.
  • If the price change (in percentage) of the security is greater than the Price-Increase\u0002Sensitivity defined for the collateral or less than the Price-Decrease-Sensitivity defined for the collateral, the revaluation process is triggered off. Otherwise the price change does not affect the existing collateral value.
  • if the market price of the security decreases, the collateral contribution to the overall limit of the customer also decreases and as a result, the available amount under the credit line reduces.

Your customer XYZ has 1000 units of Debentures’08 that have been issued by Reliance as part of their portfolio, which you consider as Collateral. The Market value of the Debentures’08 is $ 50 per unit. You have defined the Price Increase and Decrease Sensitivity for this security to be 8% and 5% respectively. Let the customer have credit limit of USD 1 million for the facility of line code “Loans”.

You have specified that this collateral’s contribution to the overall Limit of the customer should be $ 50,000.

Pool contribution to the line

Pool Code Pool CCY Line Code Line CCY Pool Line Linkage Pool Contribution Amount to Line Line Avl Amount (Credit Limit+Pool Contibution
Pool1 USD Loans USD 100% $50,000 $1.05 million

A Rise in Value

The market value of Debentures2008 has increased to $55, which is a 10% increase over the old market price of $50.

At the time you update the Market price of Debentures 2008 in the Securities Maintenance screen, the revaluation process is triggered off, as the increase (10%) is higher than the Increase sensitivity (8%) defined for Debentures 2008. The value of this collateral now stands at $ 55,000. As this amount is less than the Cap Amount you specified for the collateral the Credit Limit available to the XYZ has increased by $ 5,000, as a result of the revaluation.

Pool Contribution to the line

Pool Code Pool CCY Line Code Line CCY Pool Line Linkage Pool Contribution Amount to Line Line Avl Amount (Credit Limit+Pool Contibution
Pool1 USD Loans USD 100% $55,000 $1.055 million

A fall in value

The market value of Debentures2008 has decreased to $45, which is a 10% decrease from the old market price of $50. At the time you update the Market price of Debentures2008 in the Securities Maintenance screen, the revaluation process is triggered off, as the decrease (11.11%) is higher than the decrease sensitivity (5%) defined for Debentures 1999.

The market value of this collateral now stands at $ 45,000. XYZ’s credit limit stands decreased by $ 5,000 as a result of the revaluation.

Pool contribution to the line

Pool Code Pool CCY Line Code Line CCY Pool Line Linkage Pool Contribution Amount to Line Line Avl Amount (Credit Limit+Pool Contibution
Pool1 USD Loans USD 100% $45,000 $1.045 million

This process explained above is online process where in the change in the Security Price immediately revaluates all the collateral linked to these securities. If at the Oracle Banking ELCM Global Parameter maintenance, the option for 'Revaluate Market Online' has been selected, as batch, then the collateral revaluation as explained above is taken up as part of revaluation batch process.

Parent topic: Collateral Revaluation