Schweser states that variable rate HEL commonly use 6month LIBOR as the reference rate on the loans, but HEL-backed securities (floating) typically use 1month LIBOR as the reference rate. They go on to say that this mismatch can lead to cash shortfalls at some times. Since the reference rate on the underlying loan is 6month and the security is only paying 1month wouldn’t that mean that cash shortages would occur when the yield curve was inverted (they don’t go on to explain this)? Edit: I think I am missing something here. I not sure how this ties in with the caps on payments either.
All I can add it that there is an ‘Available funds Cap’ . This mean that when you decide what the payments are to the security holders, you put in a caveat which says ‘but only if we’ve got enough cash to make this payment’