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RESERVE BANK OF AUSTRALIA

Margins

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Initial Margin

When securities are sold to the Reserve Bank under repurchase agreement, the repurchase agreement is subject to an initial margin consistent with arrangements set out in the Global Master Repurchase Agreement. This margin is expressed as a percentage of the required market value of the repurchase agreement. The initial margins vary with the type of securities given as collateral.

The current margin schedule applies to all repurchase agreements contracted from 1 February 2012. The previous margin schedule will continue to operate for all repurchase agreements contracted prior to 1 February 2012.

Excepting certain credit-enhanced securities such as covered bonds, the minimum credit rating assigned to a security or its issuer by any of the major rating agencies will be used to assess the eligibility of the security and the applicable margin. That is, where ratings are split across agencies, the lowest available security or issuer rating will apply. In the case of covered bonds, only the minimum security rating will be considered, provided a sufficient number of such ratings are available (see below).

For ADI-issued securities with a residual maturity longer than one year, at least two major credit rating agencies must rate the security or the issuer. For covered bonds issued by ADIs, where two or more security ratings are available, only the ratings on the security will be considered. If two security ratings are not available for ADI-issued covered bonds, the minimum issuer rating will also be considered.

While they are not accepted in normal circumstances, where a related party has presented eligible residential mortgage-backed securities (RMBS) or asset-backed commercial paper (ABCP), the margin is applied to the ‘Valued Assets’ underlying a security. Valued Assets comprise:

  • Prime domestic full-doc residential mortgages insurable by an acceptable mortgage insurer, and
  • similarly qualified low-doc residential mortgages but only up to a maximum equivalent to 10 per cent of the value of all assets underlying a security.

In this circumstance, in ABCP the mortgages may be in securitised form. Mortgages in the pool underlying a RMBS or ABCP that do not meet the requirements for Valued Assets will be fully discounted by the Bank. For example, assume that Valued Assets underlying a $100 RMBS amount to $95. In this case, the Bank will provide $86.36 ($95 divided by 1.1) for the $100 of RMBS.

Issuers of eligible RMBS and ABCP must provide the Bank with information on the composition of the collateral pool underlying each security or program, respectively, so that the Bank can apply the correct margin to the security. This information should be reported by e-mailing a completed Mortgage Collateral Pool Reporting form to eligible_securities@rba.gov.au.

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Margin Calls

Each day the Bank revalues all securities held under repurchase agreement (excluding those held under intra-day repurchase agreements) at prevailing market prices. If the current market value of all the securities held under repurchase agreement with a given counterparty falls more than 1 percentage point below the initial margin – e.g. if the initial margin is 104 per cent of the required market value, but the actual margin falls below 103 per cent during the term of the repo – then the Bank will make a margin call on the counterparty. The Bank will call sufficient margin to restore the dollar value of the margin to the dollar value of the initial margin. The initial dollar value of the 1 percentage point variation margin will continue to apply for the term of the repo.

If a counterparty determines that the current market value is more than 1 percentage point above the initial margin, the counterparty may contact the Domestic Markets Desk to request a ‘return’. A Bank dealer will agree with the counterparty the stock, the related repurchase agreement and the volume to be returned. The counterparty may request returns up to an amount that would reduce the current market value of all securities to the value of the initial margin.

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Delivery of the Margin

Securities delivered to the Bank to meet a margin call are delivered through the Austraclear System for zero cash. This is commonly referred to as an ‘external settlement’. Delivery must take place by the end of the Austraclear Day Settlement Session.

Margin calls for General Collateral must be met with General Collateral securities. Margin calls for Private Securities can be met with either Private Securities or General Collateral.

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Treatment of Bonds going Ex-interest

In the case where a repurchase agreement spans the start of an ex-interest period and the coupon payment date, the current market value of the securities held under repurchase agreement may drop more than 1 percentage point below the initial margin as a result of the Bank paying away coupons received on those securities. In this case, the Bank may make a margin call at the same time as the cash coupon is paid to the counterparty to restore the dollar value of the initial margin.

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Coupon Payments and Principal Repayments

Consistent with the terms of the Global Master Repurchase Agreement, where the Bank receives a coupon payment on a security it is holding under repurchase agreement, unless otherwise agreed, the coupon payment will be passed through to the counterparty that sold the security to the Bank in the first leg of the repo. If, as a result of the pass through, a margin call on the repo is required, the counterparty will be required to meet the margin call with eligible securities.

In the event that a principal repayment occurs on an asset backed security, the Bank will pass the cash value of the principal repayment through to the counterparty on the payment date. If, as a result, a margin call is required on the repo, the counterparty will be required to meet the margin call with eligible securities.

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