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Collateral swap


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Collateral Swap

Published in: Economy & Finance, Business
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Collateral swap

  1. 1. Collateral Swaps
  2. 2. Collateral Swaps  Transaction in which assets are exchanged between two parties  Counterparty that receives higher quality assets is called as “borrower” while the counterparty that provides is known as “lender”  For borrowers, these transactions can be considered as funding trades as the high quality assets can be subsequently used to raise capital in repo markets  Banks can usually use to boost liquidity ratios (For collateral swaps > 30 days, the LCR improves and for swaps > 1 year, NSFR improves) *
  3. 3.  Borrower provides more assets than lender through additional margining  Both the borrower and lender continuously transfer the coupon payment on assets as the economic ownership remains with the party that purchased assets in the first place  As borrower is searching for liquidity, borrower pays the lender a fee despite additional margining provided  Generally banks are borrowers and Insurance companies are lenders
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