8.2.3.5 Secured Funding/Financing

This assumption is based on debt backed or secured by collateral securities associated with lending. This assumption category refers to the generation of secured funding or creation of secured financing transactions including secured loans, repos and so on. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.

Functionally, this assumption is similar to the new business assumption except for the inclusion of the underlying collateral and encumbrance status into picture.

Note:

• Assets can only be posted as collateral or specified as underlying only if they are unencumbered during the period between the Primary and Off- set bucket.
• The ability to filter assets based on their encumbrance period is supported.

The following steps are involved in applying the secured funding/financing assumption to cash flows:

1. Map inflows and outflows of the transaction to respective time buckets.
2. Calculate the corresponding interest amount.
3. Mark the assets selected as collateral/underlying as encumbered and update the encumbrance period.

   See Defining a New Business Assumption, for information on the steps involved in specifying this assumption.

   For example: If a bank is giving out an additional loan with reference to an existing loan by taking in some collateral. This is an example of a secured funding transaction, as the bank receives collateral in exchange for the cash given out. Let’s assume that the outstanding end of period balance of the original loan is 10,000. The bank extends another 10% of the loan by taking in a collateral against it say Borrow_1. Further the 10% being extended is completely offset as a bullet payment in a single bucket (100% in offset bucket).

   The above scenario is defined in the business assumption as follows:

   Table 7-25 Incremental Cash Flow – Secured Funding/Financing

   Business Assumption Definition
   Standard product type	Primary bucket	Primary value-leg 1	Offset bucket	Offset value- leg 1	Collateral/underlying	Encumbered value
   Loans	7-7 days	10	15-15 days	100	Borrow_1	50%

   Note:

   The encumbered value represents the portion of the collateral which is used to secure the loan.

   The cash flow computation for the above definition is explained as follows:

   Table 7-26 Cash flow computation

   Buckets		Cash flow
   		Contractual	BaU
   Primary bucket	7-7 days	5000	4000 (5000- (10%*10000)
   Offset bucket	15-15 days	8000	9000 (8000+(10%*10000)

   Given that the example is based on loans, the primary leg involves a deduction in cash and the secondary leg involves an addition in cash flow. The deduction/addition will be reverse in nature if the product type is an asset. The application identifies whether to deduct/add in primary bucket and offset bucket based on the product type chosen.