Lesson 20 of 25 · 6 min

A concentration limit that binds on Meridian plus Calder

Two names already occupy three-fifths of the account, so a fifty-percent cap has already been spent.

Track 1 lesson 10 treated a concentration limit as a second schedule sitting on top of the first: above a stated share, the excess is advanced at a worse rate, or at zero. On the March book the two single-name commons are 60.97 percent of market value. A 50 percent combined cap on single-name common, measured on market value, has already been crossed by 10.97 points.

Fifty percent of $6,032,795 is $3,016,397.50. The two names are $3,678,305. The excess is 3,678,305 − 3,016,397.50 = $661,907.50. If the excess is taken from Calder first — the lower-advance name, which is the usual order when a cap is applied to a pair — Calder's eligible market value becomes 1,840,005 − 661,907.50 = $1,178,097.50. Calder's lending value becomes 1,178,097.50 × 0.35 = $412,334.13, against the printed $644,001.75.

The cap removes 644,001.75 − 412,334.13 = $231,667.62 of lending value. The pool falls to 3,277,251.25 − 231,667.62 = $3,045,583.63. The blend falls to 3,045,583.63 ÷ 6,032,795 = 0.50484, which is 50.48 percent. Stated capacity is still $2,400,000, because $3,045,583.63 is still larger. Surplus above the limit shrinks from $877,251.25 to $645,583.63.

The printed 35 percent on Calder is then not the rate the cap left behind. It is the rate before the cap. Lesson 21 is the gap between those two schedules. The 60.97 percent pair share is the fact that makes the gap exist: a 50 percent cap cannot be satisfied by a book that is already three-fifths two names, unless someone writes down the excess.

A cap written on market value does not care that Calder was already discounted. It cares that two names are 60.97 percent of the wealth.

Key terms

Combined single-name cap: A limit on how much of pledged market value two or more single-name holdings may occupy together.
Excess: The market value above the cap. Here $661,907.50, taken from Calder first in the worked case.
Eligible market value: The portion of a row that remains inside the cap and still receives the category advance rate.

Worked example

A 50 percent pair cap on the two commons

March book. Illustrative rule: single-name common may not exceed 50 percent of pledged market value; excess is ineligible; excess taken from Calder first.

Pair market value: $3,678,305
50 percent of the pool: $3,016,397.50
Excess: $661,907.50
Calder lending value after the cap: $412,334.13
Lending value removed: $231,667.62
Stated capacity: $2,400,000

The cap spent $231,667.62 of surplus and left the printed 35 percent looking like the whole story, which it no longer is.

Check yourself

Meridian plus Calder are $3,678,305 of a $6,032,795 pool. A 50 percent combined cap zeroes the excess, taken from Calder first at 35 percent. How much lending value does the cap remove?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.