Broadly speaking, earmarking involves putting aside of an amount of money for a specific purpose, such as formation of a provision for mitigation of a specific risk. Earmarking also denotes the process of separating certain assets or liabilities (or other items) into financially standalone groupings or pools within the same broad structure (the entity).
Earmarking is meant to protect a resource from competing demands on its use or deployment, so that it can be confined to a specific purpose.
An example of earmarking assets for a particular purpose is an end-of-service accumulation, with a company, which may be ring-fenced for payment when the need arises. A company may earmark such funds to protect it from being drained for other cost requirements.
Earmarking can apply to different types of items or accounts including assets, liabilities, costs and expenditures, revenues, etc.
In a specific context, related to collateralization (and as opposed to collateral pool), earmarking is a technique for identifying collateral whereby assets posted as collateral are attributed to individual transactions (or to their respective transactions, etc.)
It is also referred to as ring-fence or ring-fencing.
Comments