Guide to the Management of Loan Collateral

1: Executive summary

1.1: Introduction

This guide outlines the requirements for managing pools of loan collateral once Sterling Monetary Framework (SMF) participants (‘you’) have completed the pre-positioning process. It is designed to help you understand key aspects, including:

• our monitoring and periodic due diligence – providing regular data tapes and completing periodic data audits and legal reviews;
• how to legally encumber and unencumber loan pools – by delivering them to draw against in SMF facilities, and to keep them ready to SMF facilities when needed; and
• changing the composition of loan pools – adding loans (top-ups) or removing loans within pools (loan removals).

Our loan collateral management process is designed to assure us that we can efficiently and effectively value and risk manage the assets – and that we can confidently take legal ownership of the assets if necessary. The process and requirements for management of loan collateral is consistent, regardless of the facility which the collateral is used for. Further information on our facilities, including the SMF is available on our website.

This guide provides a general overview of managing your loan pool after pre-positioning; processes may differ for some participants or collateral depending on specific circumstances. It is meant to provide helpful practical information; but in the event of any conflict with the SMF terms and conditions, the terms and conditions prevail.

This guidance should be read with the following documents as they collectively provide essential context and detail:

• The Bank’s SMF Terms & Conditions and Operating Procedures
• Level C Loan Collateral: Eligibility Criteria
• Additional Guidance for Loan Collateral
• Guide to Pre-positioning Loan Collateral – the relevant sections are highlighted throughout this guide

If you wish to pre-position a new asset class of collateral (eg you currently have residential mortgages pre-positioned and are looking to add a portfolio of consumer loans) please refer to our Guide to the Pre-positioning Loan Collateral and discuss with your collateral contact.

1.2: Contacts

Your main point of liaison regarding management of positioned pools is your lead collateral contact (‘collateral contact’) from the Bank’s Collateral Team. In email communications copy in both the collateral contact and any back-up collateral contact assigned to you.

Before taking any steps outlined in this guide you will need to discuss with your collateral contact.

Below are the other key points of contact within our Markets Directorate, these teams are available to assist with a range of queries.

Contact information

2: Drawing on SMF facilities

Once collateral has been delivered and legally encumbered, you may access our facilities via our front office (Sterling Markets Division, SMD). Quick Reference guides on how to use these facilities are available on our website for SMF operations.

When determining the amount to draw you should consider what buffer you wish to hold between the collateral value after haircuts and drawings. Given amortisation, loan pool values will decrease over time (assuming no top-ups) and so you need a future plan to avoid margin calls in the event collateral is not sufficient to cover our exposure.

Particularly for concentrated pools, the maturity or early prepayment of a large loan may see the value of the collateral decrease significantly in a short period. A larger collateral buffer would protect against unexpected changes in these cases.

Once collateral has been legally encumbered, we hold a beneficial interest or trust interest in receipts from relevant pools. Accordingly, you must record and hold on trust payments of interest or capital that are received from any borrower, issuer or guarantor relating to the loans as per the SMF Operating Procedures. Provided that no Event of Default or potential Event of Default shall have occurred or be continuing, and no obligation owed by you is outstanding under the Terms and Conditions, then you may release from the trust any such sums.

We would not normally expect to receive the cash flows generated by loan portfolios while encumbered, nor would we normally require you to establish segregated accounts for the collection of these payments, except in relation to a participant default. Nevertheless, you should ensure continued capability to do this within systems.

3: Monitoring loan pools post pre-positioning

Following pre-positioning of a loan pool(s), we conduct ongoing oversight as part of effective risk management and to monitor the appropriateness of relevant haircuts. This requires monitoring and information from you.

You should inform your collateral contact about significant changes to your business or lending practices that might impact eligibility of the pool given our published requirements. For example (but not limited to):

• changes to loan T&Cs – including T&Cs changes for further advances and product switches
• amendments to the terms of the loans – for portfolios with bespoke documentation
• changes to IT systems – such as changes in loan origination, data template production processes

3.1: Data requirements

To support ongoing oversight of pre-positioned loan pool(s), there are three key data submission requirements and these should all be uploaded via our Loans Data Portal.

3.1.1: Weekly nominal balances

To maintain an accurate valuation and determine how much can be drawn against in the SMF, on a weekly basis you will need to submit an updated nominal balance for each individual pool.

Where this is not possible (eg due to public holidays) our Loans Data team will confirm in advance the submission arrangement for the nearest working day.

3.1.2: Monthly loan data tape(s)

Our general approach in setting haircuts is to apply conservative assumptions, in part with the aim to provide broad predictability for participants, for example by avoiding where possible the need to change our underlying assumptions as economic conditions change.^{footnote [1]} We regularly review our haircut methodologies to ensure they remain appropriate.

Monthly data tapes are used to ensure we are aware of underlying changes in the risk characteristics of the pool, as well as to capture amortisation movements. Changes in the risk characteristics of loan pools can affect haircuts, even within the headline framework described above. We use the monthly tapes to inform regular quantitative assessments – alongside any qualitative factors – which means haircuts are subject to small adjustments. An updated data tape for each loan pool will need to be provided every month.^{footnote [2]} These should be submitted to the Loans Data Portal within 10 working days of the cut-off date, which should be the end of each calendar month (unless otherwise agreed with us).

Once haircuts have been updated, the value of collateral available to be drawn against will be reflected in daily statements sent to operational contacts provided as part of the static data collection process by our settlement team (statements are typically sent around 10pm). Collateral value can also be seen in the Collateral Management Portal (CMP).

Box B provides further detail on the monthly data tape submission requirements. More information can be found in ‘4: Loan data template’ of the Additional Guidance for Loan Collateral which provides detailed instructions and support on completing specific data fields, helping to ensure accuracy and consistency in data tape reporting.

3.1.3: Quarterly vintage curve submissions (applicable for consumer loans)

For consumer loan pools our arrears vintage curve reporting template will need to be completed on a quarterly basis. This enables us to assess the historic performance of your loan book, as part of our continued risk management.^{footnote [4]}

Vintage curve submissions should be submitted within 10 working days of the end of the quarter in the Loans Data Portal via the ‘Supporting Documents’ folder. The document title should state that this is a vintage curve submission and clearly identify the participant, pool ID, and date (year and quarter), eg ‘Bank of England – LOAN12345678 – Q4 2025 – Vintage curve data’.

The vintage curve template can be found on our Eligible Collateral page under ‘Key resources’.

3.2: Due diligence

Two types of ongoing due diligence are required:

• our internal core assurance monitoring includes a regular review of your lending practices and collateral delivered; and
• third-party due diligence – completed to provide assurance that there have been no changes to data accuracy or legal risks over time.

3.2.1: Our internal review

As part of our internal core assurance, we undertake periodic reviews to assess ongoing eligibility and any necessary idiosyncratic haircut adjustments – typically focusing on the changes since the previous assessment. While these reviews are typically conducted on a two-year cycle, we may choose to carry them out more or less frequently at our discretion.

The review will be conducted in a similar manner to the pre-positioning process (more information can be found in ‘3.3: Due Diligence Questionnaire (DDQ)’ in the Guide to Pre-positioning Loan Collateral). Your collateral contact will request the following documents, after which we will determine whether follow up is required:

• ‘redline’ version of the Due Diligence Questionnaire (DDQ) highlighting all changes against the previously submitted DDQ
• updated versions of supporting documents

We retain discretion to conduct repeat site visits; if so, these would typically follow the same structure and requirements as those used during initial pre-positioning (more information can be found in ‘3.4: Site visit’ in the Guide to Pre-positioning Loan Collateral).

3.2.2: Third-party due diligence

Repeat third-party due diligence (ie a data audit or legal review) is required if certain triggers are met, or if a relevant backstop is reached. This provides us with reassurance that there have been no changes to data quality or legal risks over time.

As during the pre-positioning process, reviews should be conducted by a suitable third-party (not your in-house/internal audit or legal functions) and appointments are made at your own expense. You are free to engage your external auditor or outsourced internal auditor (for the data audit), or your external legal counsel (for the legal review).

In our experience, using firms who are familiar with our requirements for collateral data audits and legal reviews may ensure a smoother and quicker process. Additionally, proactively engaging with your firms throughout the process may reduce delays. Once firms have been chosen you will need to inform your collateral contact.

The information below is provided for reference only. You should not commence third-party due diligence (data audit or legal review) until your collateral contact provides the detailed requirements.

There are two primary triggers requiring a data audit to be completed:

• if there is significant turnover in the pool (‘churn’ – more information on calculating churn can be found in Box D); or
• if there are material changes to your IT systems or data template production methods.

This review will be consistent with that outlined in ‘3.5.1: Data audit’ in the Guide to Pre-positioning Loan Collateral, more information on our broad requirements can be found in Box D within that section.

The primary trigger requiring a legal review to be completed is a material change to your standard form documentation or T&Cs. Where there have been changes to T&Cs, you will need to provide us with:

• a version of the updated documentation with changes tracked against the previous iteration; and
• include any readily available summaries of the changes that outline the reason they were made (eg papers taken to your risk committees or board).

Documents should be uploaded to the Loans Data Portal and you should confirm with your collateral contact that the documents have been received.

Following this, our internal lawyers will review and determine the materiality of the changes. Should the changes be significant, we will outline the legal due diligence required, to ensure there is no impact on continued eligibility. This review will be consistent with that outlined in ‘3.5.2: Legal Review’ in the Guide to Pre-positioning Loan Collateral, where Box E outlines our process within that section.

Subsequent legal reviews should be conducted on a ‘bring down’ basis, ie where your legal counsel takes the most recently completed reports and highlights any changes. This may reduce the time and/or cost of completing the due diligence and ensures the reports are focused on areas of change.

Absent triggers, third-party due diligence exercises will only be required when the relevant backstop is reached. This typically depends on the outcome of previous internal and external due diligence exercises and typically ranges from four to eight years; in some circumstances, we may request for this to be more frequent.

Calculating Churn threshold (for top-ups)

Participants can add further loans to a pool (a top-up). If proposed additional loans would result in turnover (or ‘churn’) in the pool greater than determined thresholds, we will require a repeat data audit ahead of completing the top-up. Churn is calculated at a participant level for each asset class: eg your residential pool and consumer pool will have their own churn rates. Where you have multiple pools of the same asset type, then total churn is calculated across pools.

Generally, it is possible to add loans to pools without a data audit until the churn threshold is breached. The threshold differs depending on the number of loans positioned (this is explained in table A). But we may request repeat data audits below or above these thresholds in some cases.

Churn is calculated using the below formula.

Churn is calculated using the below formula

Table B: Churn threshold for data audits

If the churn threshold is breached, the sample for the subsequent data audit will be selected from across all pools of the same asset class.

Box D: Churn calculation worked example

Churn calculation example

In year 1, participant X pre-positioned 2,000 owner-occupied residential mortgages, split into three pools: Pool A (600 loans), Pool B (600 loans), Pool C (800 loans). External due diligence was completed on all three pools ahead of the initial pre-positioning.

In year 2, the portfolio has amortised, and 1,500 loans remain across the pools. To maintain drawing capacity, participant X requests to pre-position an additional 500 loans.

At this point churn is calculated as 25%: 500 (loans added since data audit) ÷ 2000 (number of loans at the point of the previous data audit, rather than the current number).

As participant X had between 1,000 and 50,000 residential mortgage loans pre-positioned at the point of the previous data audit, the churn threshold is 100%. This means up to 2,000 residential mortgage loans (the number of loans pre-positioned at the point of the last data audit) can be added with no additional data audit required. Therefore, as churn is less than the churn threshold, no external due diligence is required, and (subject to our top-up analysis) additional new loans can added across the three pools (A, B & C) or all 2,000 can be added to just one pool (eg A).

In year 3, the pools amortise further to 1,500 loans. Participant X approaches us with a proposed top-up of 2,000 additional loans.

Participant X will now have added 2,500 loans since the point of the last data audit (500 added in year 2 top-up and 2,000 added in year 3 top-up). At this point the churn value is 125%, calculated as 2,500 (loans added since last data audit ÷ 2,000 (number of loans at the point of the previous data audit, rather than the current number). As churn is greater than the churn threshold of 100%, a data audit is therefore required before the 2,000 new loans can be added to the pools.

The data audit sample should be selected from all loans remaining in the portfolio from the initial pre-positioning and the year 2 top-up, as well as the newly proposed year 3 top-up loans.

Following completion of this data audit, churn is reset to 0% and the denominator for the churn calculations becomes the number of loans in the selected data tape used in the data audit.

4: Loan pool movements

4.1: Requesting loan pool movement(s)

4.2: Encumbrance and unencumbrance of loan pool(s)

We operate a collateral pooling model to support our SMF operations. Neither loan pools nor securities collateral are earmarked against individual lending transactions. Instead, the aggregate adjusted market value (ie post-haircut) of the collateral held in the Single Collateral Pool (SCP – and any sub pools) will be used to collateralise the aggregate value of all lending under the SMF.^{footnote [5]}

Once loan pools are pre-positioned you are able to move collateral from:

• Loan Pre-positioning Pool (LPP) to Single Collateral Pool (SCP) – thereby legally encumbering the pool and enabling it to be drawn against in relevant SMF facilities; or
• SCP to LPP – thereby legally unencumbering the pool, provided that sufficient collateral remains to cover the aggregate value of exposures to relevant SMF facilities.

Frequent movements are not preferred; if you anticipate the need to make frequent movements, discuss this with your collateral contact.

Legal encumbrance and/or unencumbrance of loan pools should be discussed as soon as possible with our Loans Data team via
LoansData@bankofengland.co.uk. In most scenarios, the following timeframes should be adequate depending on demand. You should provide a minimum of:

• 1 working day’s notice to encumber or unencumber an equitable assignment pool (for example to execute the encumbrance and/or unencumbrance by Wednesday a request must be put in by 10am Tuesday)
• 5 days’ notice to encumber or unencumber a declaration of trust pool

4.2.1: Encumbrance

For declaration of trust pools only – documentation will need to be signed and hard copies will need to be sent to us prior to the day of encumbrance to process the movement.

The following documentation should be provided by 10am on the day of encumbrance:

• a 'Collateral In' confirmation template
• a completed Loan Collateral Transfer Request Notice (LCTRN)

4.2.2: Unencumbrance

The following documentation should be provided by 10am on the day of unencumbrance:

• a 'Collateral In' confirmation template
• for Declaration of Trust pools, the legal documents must be provided

4.3: Pool top-up

As loan pools amortise, top-ups may be required to ensure your drawings are fully collateralised and/or to maintain or increase drawing capacity. We allow loan pools to be topped-up at your discretion and subject to our due diligence requirements outlined in ‘3.2.2: Third-party due diligence’ on this page. Top-ups may occur where the loans being added are similar to those already in the pool, eg they are of the same business line, utilise the same standard loan documentation, and are held on the same systems.

Top-ups are normally added to existing pools although we may consider requests to pre-position additional loans in new pools (ie under new pool identifiers).

4.3.1: Top-up request initiation

A ‘Top-up request form’ should be completed in advance of top-up, and sent to your collateral contact to initiate the request. Once the collateral contact has reviewed the form, they will confirm whether third-party diligence is necessary (details on the process is explained in ‘3.5: Third-party due diligence’ in the Guide to Pre-positioning Loan Collateral). Your collateral contact will also communicate timings and will try to meet your preferred top-up date(s) where possible.

4.3.2: Review process

Your collateral contact will request two data tapes to be uploaded (current and proposed post top-up data) to the Loans Data Portal under the relevant pool identifier, more information can be found in Box E.

The collateral contact will review the data tape submissions and send you any queries.

Once approved we will communicate the revised haircut and arrange for a mutually convenient day to execute the top-up (avoiding Fridays).

The legal documentation signed at the point of pre-positioning (ie the annex for loan transactions, power of attorney or side letters) remain valid and therefore do not need to be re-signed.

For Scottish/English declaration of trust and where the pool is encumbered, our Loans Data team will share any additional documentation to be completed. This process must be initiated at least 5 working days before the top-up date to ensure sufficient time for the documents to be returned to us. Without these, the top-up cannot be completed.

4.3.3: Day of top-up instructions

The following must be completed by 10am on the day of the top-up:

• submit the nominal balance for the pool – including both the current loans and top-up loans – to the Loans Data Portal
• submit a completed Loan Collateral Transfer Request Notice (LCTRN) if pool is legally encumbered in the SCP
• legal counsel to execute documents (only required where an updated legal review has been completed)
  • your legal counsel should date the legal documents previously approved and send copies to our external legal counsel. This should be completed as early as possible on the day of the pre-positioning. We encourage you to remind your lawyers ahead of the day; and
  • our legal counsel then collates the documents with its own reports and sends to us a Conditions Precedent email that brings together all the legal documentation.

Once the above is completed, we will confirm that the top-up went through as planned. The revised value of collateral will be reflected in daily statements sent (typically around 10pm) to operational contacts. Collateral values can also be seen in the Collateral Management Portal (CMP) after confirmation of completion.

4.4: Loan removal

Providing there is sufficient collateral to secure drawings, a portion of loans within a pool(s) can be removed. Once removed however, the loans cannot be returned to us without going through the review described in the ‘4.3.2: Review process’ on this page.

Except where loans have matured/been redeemed, all loans must remain in the pool(s) and can only be removed through the formal process of completing a loan removal movement.

Loan removals do not impact churn or periodic review timings.

Principles for removing loans:

• to minimise operational costs, loan removals should ideally be of material value, not overly frequent, and where possible should be aligned with other movements (such as a top-up); and
• you should have the ability to identify (using the loan identifier field of the data tape) which loans require removal.

For the relevant pools, two data tapes will need to be submitted:

• the month-end BAU data tape before any loans are removed; and
• a data tape reflecting the post-removal loan pool (cut-off date one day before the month-end data tape).

In addition to the two data tapes, an Excel document containing a list of the loan identifiers being removed should be uploaded to the ‘Supporting Documents’ folder of the Loans Data Portal.

Loans scheduled for removal should continue to be included in the weekly balance submission(s) until the removal process is operationally complete.

Your collateral contact will review the data tapes and assess the impact of the removals and set an appropriate haircut(s) for the loans remaining in the pool.

4.5: Pool splits

Four or fewer pools are typically sufficient to support collateral activity. Excessive numbers of pools are discouraged given the associated operational costs; but if you have a specific business need to split loan pools (whether encumbered or unencumbered), talk to your collateral contact to discuss options.

Pool splits have no impact on churn or periodic review timings.

If required, a new pool identifier will be created by your collateral contact for the loans being split out from the original pool.

Three data tapes will need to submitted:

• existing pool month-end BAU data tape which shows the position pre-split;
• existing pool post-split, ie excluding the loans moved to the newly created pool - cut-off date one day before the above data tape; and
• a data tape comprising of the split-out loans (with a month-end cut-off date using new pool identifier if applicable).

Your collateral contact will review the data tapes and assess the impact of the split and set appropriate haircuts.

4.6: Pool merger

If you have multiple pools of the same asset type (encumbered or unencumbered), you are able to merge them creating larger more diverse pools. However, this is only applicable for pools that are legally transferred by way of an equitable assignment. It is not possible for two pools that are transferred by way of a declaration of trust to be merged, other than by collapsing and re-constituting the trust structure, which is operationally prohibitive.

Pool mergers do not impact churn or periodic review timings.

Three data tapes will need to submitted:

• for both pools being merged, the month-end BAU data tapes; and
• a data tape reflecting the post-merger position for the remaining pool (cut-off date one day before the month-end data tape).

Your collateral contact will review the data tapes and assess the impact of the merger and set an appropriate haircut(s).

4.7: Pool removal

Provided you have sufficient collateral backing existing SMF drawings, loan pools can be removed. Once a pool is removed, the pool/loans cannot be returned to us without going through the review as outlined in the ‘4.3.2: Review process’ on this page. Where all pools for a given asset class are removed, it remains in our discretion whether the full pre-positioning process may need to be completed if you wish to pre-position those assets again, as outlined in the Guide to Pre-positioning Loan Collateral.

If the loan pool is legally encumbered, the loan pool must first be unencumbered before completing a pool removal. The unencumbrance must be completed at least 1 working day prior to the pool removal (the unencumbrance process is explained in ‘4.2: Encumbrance and unencumbrance of loan pool(s)’ on this page).

4.8: Loan pool movement timings

The timeline from initiating a movement request to completing the operational execution of a loan pool movement can vary, although for most movements the process typically takes 2 to 6 weeks. In our experience, a number of factors can influence the timings of loan pool movements. Those are outlined in the table below, to help identify areas where participants can take steps to expedite the process. Some overarching factors include:

• whether third-party due diligence is required – in which case, the timeline generally extends to 3 to 6 months (more information can be found in ‘3.5: Third-party due diligence’ in the Guide to Pre-positioning Loan Collateral); and
• your engagement throughout the process, for example ensuring prompt responses and provision of clear and complete information.

We would typically notify you of any impact if there are likely to be any delay to loan movements – for example, because of operational reasons or high operational demand.

It is helpful if you can inform us of your intended collateral activities (eg top-ups) in advance, as this enables us to target our resource and planning. We will try and accommodate changes to plans although we cannot guarantee to meet requests should advance notice not be provided.