Lesson 14 of 25 · 7 min
Reclassification during a tightening
Several holdings change row on the same night, because thresholds are fixed levels and a decline arrives as a percentage.
Track 8 lesson 11 described one holding moving between rows of a schedule because a data field changed. In a tightening the interesting property is not that this happens but that it happens to several holdings on the same night.
The reason is that thresholds are absolute levels while declines are percentages. A minimum eligible price is stated in dollars. A rating boundary is a fixed category. A volume test is a share count. A broad decline moves every price by a similar proportion, so holdings that sat 14, 19 and 25 percent above a $5 floor were never three independent bets on that floor. A 22 percent fall crosses two of the three at the same time.
Take three holdings at a 45 percent advance rate: 10,400 shares at $6.20, 7,900 at $5.85 and 22,500 at $6.70, together $117,650.25 of lending value. A 22 percent fall puts the first two below $5 and leaves the third at $5.226. Lending value ends at $52,913.25 — a 55 percent loss on a 22 percent decline. Of the $64,737 lost, $25,883.05 was the price and $38,853.95 was the row.
A second channel runs alongside the first. Schedule versions are republished more often in a tightening, and a republication can redefine a row rather than move a holding into a different one. A category is split in two. A volume test is added. A minimum price goes from $5 to $8, which reclassifies everything between those two figures overnight. Here the holding's own data did not change at all; the definition moved underneath it.
The implication for a pledged portfolio is narrow and worth stating exactly. Holding five names rather than one diversifies price risk. It does not diversify threshold risk, because the distance to a threshold is measured in the same units for all five and the decline arrives in all five at once.
Key terms
- Price floor
- A minimum price below which a share is credited at a reduced rate or nothing. An absolute level, which is why a proportional decline crosses several at once.
- Schedule version
- A dated publication of the whole table of rows and rates. Republished more frequently in a tightening than in a calm period.
- Row redefinition
- A change to what a category means rather than to which category a holding is in. It reclassifies holdings whose own data never moved.
Worked example
One decline, two thresholds crossed together
Illustrative figures. Three holdings at a 45 percent advance rate with a $5 minimum eligible price, and a broad 22 percent decline.
- Lending value before
- $117,650.25
- Prices after the fall
- $4.836, $4.563, $5.226
- Lending value on price alone
- $91,767.20
- Lending value after reclassification
- $52,913.25
- Split of the loss
- $25,883.05 price, $38,853.95 row
- Total reduction
- 55.0%
45 percent of $261,445 of market value.
Two of three below the floor.
If every holding kept its row.
The first two credited at nothing.
Totalling $64,737.
On a 22 percent decline.
Three holdings, one decline, and three fifths of the damage came from a $5 line rather than from the market.
Check yourself
You hold 16,800 shares at $6.90 and 9,300 shares at $5.40, both credited at a 40 percent advance rate under a $5 floor. Prices fall 19 percent. How much lending value is lost, and how much of it is the floor rather than the fall?
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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.