Lesson 11 of 25 · 6 min
Reclassification: the same share, a new advance rate
Nothing about a holding has to change for its schedule row to change; the category it is filed under can move instead.
A schedule assigns rates to categories, not to securities. Which category a security sits in is a field in a database, maintained by a data process, and fields change.
Ordinary events that move a holding from one row to another:
- A price falling through a stated floor, which moves a listed share into a penalty row or out of eligibility entirely.
- A change in index membership, which can move a name from a large-company row to a mid-sized one.
- A ratings change on a bond, which moves it between investment-grade and other rows.
- A fund changing its stated mandate, which can turn a broad row into a sector row.
- A merger or reorganisation that converts shares into a different instrument with a different row.
None of these is a decision about the borrower. The schedule did not move, the discretion clause was not exercised, and no one opened the file. The data changed, the lookup returned a different number, and the nightly run applied it. This is worth holding on to, because reclassification produces the same effect as a discretionary cut while being something quite different in kind.
The compounding is what makes it sharp. A price floor is crossed by a price falling, and the fall has already reduced lending value on its own. The reclassification then removes what is left. Two separate reductions arrive from one event, and the second one is invisible unless you know the floor exists.
Key terms
- Reclassification
- A holding moving between rows of the schedule because an attribute changed. Mechanical, not discretionary, and usually unannounced.
- Penalty row
- A category carrying a much reduced rate, used for holdings that have crossed a threshold such as a minimum price or a rating boundary.
- Reference data
- The maintained attributes of a security — category, rating, index membership, price history — that the schedule is looked up against.
Worked example
One price fall, two reductions
26,400 shares, initially at $9.60. The schedule credits listed shares above a $5 floor at 50 percent and below it at nothing.
- Market value at the start
- $253,440
- Lending value at the start
- $126,720
- Market value after the price falls to $4.62
- $121,968
- Lending value at the old 50 percent row
- $60,984
- Lending value after reclassification below the floor
- $0
26,400 × $9.60.
$253,440 × 0.50.
26,400 × $4.62.
The loss from the price alone is $65,736.
The reclassification removed the remaining $60,984.
A 51.9 percent price fall removed 100 percent of the lending value. Half the damage was the price and half was the row it landed in.
Check yourself
A holding of 18,200 shares at $6.30 carries a 45 percent advance rate. The price falls to $4.85, crossing a $5 floor that moves the holding to a zero row. How much lending value was lost to the price, and how much to the reclassification?
Saved in this browser only. No account, nothing sent anywhere.
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.