Lesson 5 of 25 · 6 min
Ineligible collateral: the assets that count for nothing
An asset can be worth real money, sit inside the pledged account, and contribute exactly zero to what may be drawn.
Zero is not the bottom of the schedule's range. It is a separate category, and it works differently from a low percentage: a low rate reduces an asset's contribution, while ineligibility removes the asset from the calculation entirely.
Categories that commonly carry nothing, none of which imply the asset is bad:
- Restricted or legended stock, and anything subject to a lock-up.
- Holdings in which the borrower is an insider or a control person.
- Securities of the lender itself or of companies in its own group.
- Unlisted and privately held interests, which have no continuous price.
- Listed shares trading below a stated price floor, commonly a few dollars.
- Assets held somewhere other than the pledged account.
The asymmetry is worth stating plainly. An ineligible asset inside a pledged account is still pledged. It still carries market risk, it still moves your total market value around, and in a liquidation the lender's security interest generally reaches it. What it does not do is create capacity. The pledge runs one way; the credit runs the other.
This produces the largest single gap between what a borrower expects and what the system computes. Read a schedule, find your asset classes, and you may conclude your account supports something near 64 percent. Remove a fifth of the account from the numerator while leaving it in the denominator and the number that actually governs is closer to 50. Nothing on a holdings page marks which lines are which.
Key terms
- Ineligible collateral
- A pledged asset the lender will not count at all. Distinct from a low advance rate, which counts the asset at a discount.
- Price floor
- A minimum share price below which a listed stock stops being credited, commonly a few dollars. A falling price can cross it without any other change.
- Effective advance rate
- Lending value divided by the whole account's market value, including the parts that count for nothing.
Worked example
What one ineligible line does to the whole account
A $1,240,000 pledged account in which $268,000 sits in a restricted holding. The rest carries a blended 64 percent.
- Total market value
- $1,240,000
- Ineligible portion
- $268,000
- Eligible market value
- $972,000
- Lending value
- $622,080
- Effective advance rate on the whole account
- 50.2%
21.6% of the account.
$1,240,000 less $268,000.
$972,000 × 0.64.
$622,080 divided by $1,240,000.
The schedule said 64 percent and the account delivered 50.2. The 13.8-point gap is one line item that appears on every statement at full value.
Check yourself
An $800,000 pledged account contains $145,000 of an unlisted interest that the schedule treats as ineligible. Everything else carries a 70 percent advance rate. What is the lending value, and what advance rate is the account effectively getting?
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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.