Refile Trigger: Unmatched M-1 Collateral

Refile Trigger: Unmatched M-1 Collateral

1. Overview

Under the Single Counterparty Credit Limits (SCCL) rule, covered companies must report their credit exposures and mitigating factors accurately in the FR 2590 report. One common issue that can trigger a refile is unmatched collateral reported in Schedule M-1 but not properly linked in Schedule G-5. Because Schedule G-5 captures the risk-shifting of credit exposure from the original counterparty to the collateral issuer, an unlinked M-1 entry reduces the exposure to the original counterparty without increasing the exposure to the collateral issuer. This mismatch distorts net credit exposure calculations and may understate exposure to the collateral issuer, making it appear farther from SCCL limits than it actually is. In this post, we will explain why unmatched M-1 collateral is a serious issue, how it affects SCCL compliance, and what firms can do to prevent refiles due to this reporting error.

2. Regulatory Requirement

The SCCL rule, under 12 CFR Part 252, Subpart H, sets strict limits on a covered company's net credit exposure to any single counterparty. To meet these requirements, firms must report their gross and net exposures across several FR 2590 schedules. Schedule M-1 covers eligible collateral used to reduce credit exposures. When this collateral is used to shift risk away from the original counterparty, the exposure must be reattributed to the collateral issuer. That reattribution is reported on Schedule G-5. According to §252.74(b)(2), when a covered company uses eligible collateral to reduce exposure to a counterparty, it must also include the adjusted market value of that collateral when calculating its exposure to the collateral issuer. The FR 2590 instructions emphasize that all schedules must be consistent. Collateral reported on M-1 must be matched to risk-shifting exposures in G-5. Any discrepancies may lead to incorrect net exposure calculations and could trigger a refile.

3. Common Challenges

One of the most frequent problems we see in SCCL reporting is unmatched M-1 collateral. This happens when a firm reports eligible collateral on Schedule M-1 but fails to include it in Schedule G-5. Here are the main consequences:
  • Missing exposure to the collateral issuer: The SCCL rule requires that risk-shifted exposure is attributed to the issuer of the collateral. If this is not reported in G-5, the exposure to the collateral issuer is missing. This violates the rule's requirement for correct exposure attribution.
  • Data integrity problems: The Federal Reserve expects consistency across all FR 2590 schedules. When M-1 and G-5 are not aligned, it signals a potential failure in internal controls and data reconciliation processes.
These issues are more than just technical errors. They can lead to regulatory scrutiny, the need to refile past reports, and in some cases, questions about the firm's overall SCCL compliance framework.

4. Peer Approaches

Many institutions are actively working to improve the quality and consistency of their FR 2590 data. Here are some best practices we have seen across the industry:
  • Automated data reconciliation: Leading firms use automated systems to check that every piece of collateral reported on M-1 is properly matched to a G-5 row. These systems can flag unmatched collateral in real time before submission.
  • Materiality thresholds for review: Firms often set internal thresholds to decide when a mismatch is material enough to require remediation or a refile. This helps focus attention on the most impactful issues.
  • Cross-functional review teams: Some banks use joint review processes involving risk, finance, and regulatory reporting teams. These reviews help ensure that mapping logic is correct and up-to-date.
  • Audit-ready documentation: Peer firms often maintain detailed documentation showing how each credit exposure and mitigant is mapped from source systems to FR 2590 schedules. This is essential for both internal reviews and responding to regulator questions.

5. GLOBAL ABAS View

At GLOBAL ABAS, we see unmatched M-1 collateral as one of the most common and preventable causes of FR 2590 refiles. Based on our experience advising covered companies, we recommend the following practices to reduce the risk of this issue:
  • Automated reconciliation checks: Every FR 2590 cycle should include a dedicated control to check that M-1 and G-5 are fully reconciled. This should be built into the reporting workflow and run before submission.
  • Regular unmatched collateral reviews: Firms should run unmatched collateral reports early and often during the reporting period. These reports can identify exposure rows that are missing in G-5 or incorrectly mapped.
  • Clear mapping logic documentation: It is essential to have clear, documented logic that explains how collateral on M-1 is linked to G-5. This includes the matching of identifiers, exposure types, and associated counterparties.
  • Governance and escalation procedures: When a material mismatch is identified, there should be a formal process to escalate the issue to compliance or regulatory reporting leadership for resolution.
We also advise our clients to assess whether a mismatch is material enough to justify a refile. A refile may be necessary if:
  • The unmatched M-1 collateral significantly affects the net exposure calculation for a counterparty.
  • It results in an actual or perceived breach of the SCCL limit.
  • The issue points to broader weaknesses in the firm's internal controls or reporting process.

6. Final Thoughts

Unmatched M-1 collateral is more than a technical error. It affects SCCL compliance, risk attribution, and regulatory credibility. The Federal Reserve expects complete and consistent data across all FR 2590 schedules. When collateral on M-1 is not matched to a G-5 row, the firm risks understating its exposure or misreporting its credit risk profile. The good news is that this issue is preventable. With the right controls, documentation, and review processes, firms can catch mismatches before they trigger a refile or a regulatory issue.

To learn more about how GLOBAL ABAS can support your SCCL compliance program, visit our website or subscribe for future updates.

Disclaimer: This blog post is for informational purposes only and reflects our understanding of the SCCL rule and FR 2590 reporting as of the date of publication. It does not constitute legal, regulatory, or professional advice. Institutions should consult with internal and external advisors and refer directly to the SCCL rule (12 CFR Part 252, Subpart H) and FR 2590 instructions for specific guidance. GLOBAL ABAS disclaims any liability for actions taken or not taken based on this information.

Consult a GLOBAL ABAS Consulting, LLC professional regarding your specific issues and questions. Your feedback will help us improve the SCCL Compliance Lab. Please let us know what you think in the Comment below. Copyright © 2025 GLOBAL ABAS Consulting, LLC. All rights reserved.

Comments

Post a Comment

Popular posts from this blog

GAAP Consolidation vs. SCCL Aggregation: A Two-Step Framework for Identifying a Single Counterparty

Image
GAAP Consolidation vs. SCCL Aggregation: A Two-Step Framework for Identifying a Single Counterparty 1. Overview The Single Counterparty Credit Limits (SCCL) rule sets strict limits on how much credit exposure a large U.S. bank holding company or intermediate holding company (IHC) can have to any single counterparty. To comply with this rule, firms must correctly identify what counts as “a single counterparty.” This is not always straightforward. Some counterparties are part of complex corporate structures. Others may not be consolidated under accounting rules but are still closely tied through control relationship or economic interdependence. The SCCL rule addresses this challenge through a two-step framework: Step 1: Determine the counterparty based on GAAP consolidation (specifically, for the counterparty type of "company"). Step 2: Aggregate additional exposures based on control relationship or economic interdependence. 2. Regulatory Requirement Th...
Read more

What is SCCL? A Beginner’s Guide

Image
What is SCCL? A Beginner’s Guide 1. Overview The Single-Counterparty Credit Limits (SCCL) rule is a key regulation issued by the Federal Reserve. It is designed to make sure that large banks do not take on too much credit risk with any single borrower or trading partner. In simple terms, SCCL limits how much a bank can lend or be exposed to any one counterparty. The goal is to reduce the chance that the failure of a large counterparty, like a major financial institution, could threaten the health of a bank or even the broader financial system. SCCL is part of the broader set of rules under the Dodd-Frank Act aimed at making the financial system safer. You can think of SCCL as a diversification rule for credit exposure. Just like investors are encouraged not to put all their money in one stock, SCCL requires banks to spread their credit risk across different counterparties. 2. Regulatory Requirement The SCCL rule ...
Read more

SCCL vs. Large Exposures Framework: Key Differences

Image
SCCL vs. Large Exposures Framework: Key Differences 1. Overview The Single Counterparty Credit Limits (SCCL) rule and the Basel Large Exposures Framework (LEF) are both designed to reduce the risk that a bank suffers significant losses due to its exposure to a single counterparty. Both frameworks aim to promote financial stability by limiting how much credit risk a bank can have with one firm or group of connected firms. However, while they share a common goal, the U.S. SCCL rule and the Basel LEF differ in how they define exposures, set limits, and require reporting. The Basel LEF sets a global standard. The SCCL rule builds on that foundation but introduces more specific and often stricter requirements in the U.S. context. 2. Regulatory Requirement Basel Large Exposures Framework (LEF): Applies to internationally active banks under Basel III. Limits exposure to any single counterparty or group of connected counterparties to 25% of the bank’s Tier 1 capital. Re...
Read more