Lesson 7 of 25 · 6 min

Why the two rates are set by different people on different cadences

One is a committee decision revisited a few times a year; the other is a batch job that runs every single night.

The advance rate and the maintenance threshold do not just answer different questions. They are produced by different parts of the institution, on schedules that have nothing to do with each other.

The schedule belongs to a collateral-risk or credit-policy function. Revising it is a project: someone models the asset classes, someone drafts a new version, a committee approves it, and it is published with an effective date. That happens a handful of times a year in a quiet market and more often in a loud one. It is deliberate, it is slow, and it moves in large steps because it has to be worth the process.

The maintenance test belongs to nobody in particular. It is a line of code. Every night the system loads closing prices, revalues each pledged account, applies whichever schedule version is in force, compares the balance against the threshold, and writes the exceptions to a queue. It runs roughly 252 times a year and it involves no judgement whatsoever until something breaks.

The consequence is a strange rhythm on the borrower's side. The number that decides whether you are in trouble today is recomputed continuously and almost never changes its own definition. The number that decides how much you may borrow changes rarely, discontinuously, and for an entire asset class at once. One is a smooth process with a fixed rule; the other is a fixed process with a rule that jumps.

Key terms

Schedule version: A dated edition of the advance-rate table. Published as a whole document, so a change to one row arrives as a new version of all of them.
Nightly revaluation: The batch process that reprices every pledged account after the close and tests it against the maintenance threshold. No person is in the loop.
Exception queue: The list the nightly run produces of accounts that failed a test. The first point at which a human sees anything.

Worked example

One year of two cadences

An illustrative facility secured by a $412,000 position in one listed company, price unchanged all year.

Nightly revaluations run against the account: 252
Schedule versions published in the year: 3
Advance rate across those versions: 60% / 60% / 45%
Capacity before the November version: $247,200
Capacity after it: $185,400
Capacity removed on one night: $61,800

Two hundred and fifty-two tests changed nothing about the rules. One publication removed $61,800 of capacity from an unchanged position.

Check yourself

You hold $538,000 of one listed company against a balance of $260,000. A new schedule version moves that company's class from 55 percent to 40 percent. The price does not move. Where do you stand before and after?

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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.