Lesson 4 of 25 · 7 min
Who computes it, and on what clock
The test runs while you are asleep, on prices that stopped moving hours before, and nobody reviews it.
Nobody at the lender looks at your account on an ordinary day. The test is run by a batch process that reads three files and writes one report, and the hours at which it does so decide when you can first know anything.
A representative sequence. The market closes at 16:00 and official closing prices are published over the following hour or two. A positions file is cut at around 19:00, showing what was held as of the close rather than what was traded during the day. The advance-rate table is applied. Some time after midnight the collateral engine runs — call it 02:14 — and produces an exceptions report listing every account whose balance exceeds its permitted balance.
Put numbers on one row of that report. Collateral value at the close was $1,082,000 and the threshold is 66 percent, giving a permitted balance of $714,120. The balance was $726,500, so the shortfall is $12,380, and a cure by sale at that threshold would require $12,380 ÷ 0.34 = $36,411.76. All of it was determined by 16:00 and none of it was visible to you at 16:00.
A human enters the sequence late and usually only to review the largest rows. The report itself is not a judgment: it is the output of an inequality applied to every account at once. By the time a notice is generated at, say, 07:26, roughly fifteen hours have passed since the prices that caused it stopped changing, and for most of those hours no market was open in which anything could have been done.
The lender's clock and the market's clock are not the same clock, and neither is yours. A call is computed on stale prices at an hour when nothing can be traded.
Key terms
- Collateral engine
- The overnight process that reprices every pledged account, applies advance rates and thresholds, and lists the failures.
- Exceptions report
- The output listing accounts that failed the test. Being on it is the event; the notice is downstream of it.
- Positions file
- The snapshot of holdings the engine reads, cut after the close. It describes the account as of the close, not as of now.
Worked example
Fifteen hours between the cause and the news
Collateral value at the close $1,082,000, threshold 66 percent, balance $726,500.
- 16:00 — prices stop moving
- $1,082,000
- 19:00 — positions file cut
- Holdings as of the close
- 02:14 — engine computes permitted balance
- $714,120
- 02:14 — shortfall written to the report
- $12,380
- 07:26 — notice generated
- Cure by sale $36,411.76
- 09:30 — a market exists again
- 17.5 hours after the cause
$1,082,000 × 0.66.
$726,500 − $714,120.
$12,380 ÷ 0.34.
Every figure was fixed at 16:00. The first moment at which any of them could be acted upon was the following morning.
Check yourself
Collateral value closes at $512,000 with a 71 percent threshold and a balance of $368,000. When was the shortfall created, and when could it first have been acted on?
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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.