A credit extension transaction in which collateralization is self-activated (automatically triggered) when a buyer does not have sufficient funds to settle a securities transaction. Auto-collateralization aims to improve a market participant’s cash position (as buyer of securities) for the next settlement cycle. The credit extended is obtained using securities already held by the buyer (collateral securities) or the securities that are being purchased (collateral flows).

Under auto-collateralization, liquidity is automatically supplied by either a central bank or a payment bank.