Baskets of protection and the protection type

• Question ID: 2017/0012
• Date of publication: 09/08/2017
• Subject matter: Protection items in AnaCredit, Structured products and repurchase agreements
• AnaCredit Manual: Part II
• Data attribute: Type of protection, Type of protection value

Question

What is the protection type for a basket of both debt securities and equity securing an instrument reported to AnaCredit? Moreover, suppose that the basket initially includes more debt securities than equity, but over time the basket includes more equity than debt securities, should the type of protection be changed to “equity and investment fund shares or units” for the existing protection or should it be considered as a new protection item with a new protection identifier?

Answer

The AnaCredit Manual (Part II, Section 9.2) states that bundled protection items (i.e. a basket of protection which entails several individual items) may be reported as one multi-name protection item provided that the bundled protection items are valued and considered by the reporting agent as one protection item (hereinafter referred to as “the valuation principle”). However, it is clarified that it is possible to make use of the convenience of reporting one multi-name protection item only if a basket consists of like elements, for example, if it consists of either debt securities or equity. Conversely, protection items with different characteristics are considered to be different protection items and reported separately to AnaCredit.

Therefore, concerning the specific case described in the question, the protection items are reported separately to AnaCredit, from the beginning, rather than as one multi-name protection item. Thereby debt securities and equity are reported as separate protection items (the debt securities possibly being one bundled protection item and the equity another, in accordance with the valuation principle) under the corresponding type of protection.

Moreover, if over time more equity is added to secure the instrument, the additional equity may be considered a new protection item with a new protection identifier or may be reported under the existing protection item – cf. Section 2.3.3 in Part III of the AnaCredit Manual. However, please note that the latter option is available only if this is in line with the valuation principle for reporting bundled protection items).

In regard to the question of which other features (i.e. besides the type of protection) should match in order to be able to consider protection items alike (and thus reportable as one multi-name protection item), these include aspects such as the type of protection value, the protection valuation approach, maturity considerations and, where relevant, the real estate collateral location. For example, equity which is reported to AnaCredit at its fair value cannot be bundled with debt securities which are reported at notional amount (see Section 9.4.5, Part II of the AnaCredit Manual).

However, specifically in the case of centrally cleared repurchase agreements where reporting agents do not have sufficiently detailed information about such bundled protection (and obtaining it would involve substantial costs), protection items of different types may be bundled provided that they are indeed valued and considered by the reporting agent as one multi-name protection item. Nevertheless, since granularity is an inherent objective of AnaCredit, it is expected that granular information on the composition of baskets of protection will gradually be available in reporting agents’ systems.