Lesson 8 of 20 · 6 min
Term eight: your other agreements can reach this line
Other relationships with the same institution can affect this facility, through cross-references you did not negotiate separately.
The eighth term is the least visible. Other agreements you have with the same institution can affect this line, which means the facility is not as self-contained as reading it alone suggests.
The mechanisms that create the linkage:
- Cross-default: a default under another agreement can constitute a default under this one, even if this facility is performing.
- Cross-collateralisation: collateral pledged here can secure other obligations, and other pledged assets can secure this one.
- Set-off: the institution may apply balances held in one account against amounts owed under another.
- Aggregate exposure limits: total exposure across relationships can constrain any individual facility.
None of these appears when you look at this facility's numbers. Your loan-to-value can be comfortable, your payments current, and your position still be affected by something happening in a different agreement with the same counterparty — a mortgage, another line, a business facility, a margin account.
The concentration effect is worth naming. Consolidating banking, brokerage and borrowing with one institution is convenient and produces better pricing, and it also means a single counterparty's reassessment reaches every part of your balance sheet at once. That is not an argument about where to bank; it is a description of a correlation, of exactly the kind Track 4 lesson 15 warned about — an exposure that looks diversified in the list of accounts and is not diversified in what drives it.
This term is also the hardest to verify, because establishing it requires reading several agreements against each other rather than one carefully. The cross-reference is usually a single sentence in each document, pointing outward.
Key terms
- Cross-default
- A clause making a default under one agreement a default under another, even if the second is performing.
- Cross-collateralisation
- Collateral pledged under one agreement securing obligations under another.
- Set-off
- An institution applying a balance it holds for you against an amount you owe it, without a separate instruction.
- Counterparty concentration
- Having many relationships with one institution. Convenient, better priced, and a single point through which a reassessment reaches everything.
Worked example
One relationship, four exposures
A borrower with four products at one institution, all performing.
- Securities-backed line
- $310,000 drawn, LTV comfortable
- Mortgage
- Current
- Business facility
- Current, revolving
- Cash and brokerage accounts
- Held at the same institution
- Documents to read to establish the linkage
- All four, plus schedules
- Sentences creating it in each
- Typically one
Four separate products, one counterparty, and a linkage established by a handful of sentences distributed across four documents.
Check yourself
Your securities-backed line is performing and its LTV is comfortable. How could another agreement with the same institution affect it?
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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.