Eligibility Spotlight: Shared Collateral Rights

posted on Tuesday, October 1, 2019 in Member Services

Critical to successful collateral management at both wholesale and retail levels is the awareness of which creditor has rights to what collateral. This is a common risk management issue both for our members - on your loans - and for the Federal Home Loan Bank of Des Moines (the Bank).  

The Bank must be in a first priority lien position over collateral pledged (.pdf). To this extent, a loan cannot be simultaneously pledged to the Bank and another creditor (e.g., the Federal Reserve Bank). Similarly, if a loan is secured by collateral that also secures another loan or other obligation, with equal priority, the Bank cannot accept the loan as collateral unless the Bank has a first priority lien on both obligations. 

Note: For participation loans, the collateral risk for shared collateral rights among the participants is addressed in the Participation Loan Guidelines

Shared Collateral Example: Collateralized Swap 

In the event a swap obligation is collateralized by the same mortgaged property collateralizing a pledged loan, the Bank is unable to accept the loan as collateral unless the collateralized swap’s rights to the mortgaged property are subordinate to the collateral rights of the pledged loan. The ineligibility of such loan holds for when the swap provider is the pledgor (i.e., an internal swap) or a third party. 

For collateralized internal swaps, the Bank may be able to work with the pledgor on subordination of the swap’s collateral rights in order to maintain the loan’s eligibility for continued pledging.  

Read more about collateral eligibility guidelines or contact the Collateral Department with questions.