What is the treatment in LCR and NSFR of cash collateral given or received in derivative transactions?
Cash collateral should not be subjected to an additional outflow of 20%. We believe that this paragraph was written under the assumption that the collateral was in the form of securities whose price may alter from day to day which clearly not the case with cash collateral. Art [new] 423 (6) says that deposits (i.e. cash) shall not be considered liabilities. The case of NSFR is still more problematic. Let’s assume we have a derivative margining set that reports a negative MTM back by cash collateral (given to the specific counterparty). In Balance Sheet, the negative MTM is reported in the Liabilities side, on the contrary the cash collateral is recorded in the Asset side. Where should the “cash collateral given” be allocated in the NSFR? If it would be allocated in the item “other assets”, it should be assigned a ASF factor equal to 1; this means that the “cash collateral given” should be 100% funded by “stable funding”. Is this the case? Same problems with derivative margining set with positive MTM back by “cash collateral received”: should this “cash collateral received” weighted by a RSF factor of 0%?
With regard to the liquidity coverage requirement, Article 423(1) of Regulation (EU) No. 575/2013 (CRR) states that collateral other than assets referred to in Article 416(1) (a) to (c) shall be subject to a 20% outflow. Article 416(1)(a) include cash, therefore Article 423(1) of the CRR does not apply to cash collateral.
Article 422 (6) states that institutions shall take outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II into account on a net basis across counterparties and shall multiply them by 100% in the case of a net outflow. Net basis shall mean also net of collateral to be received that qualifies as liquid assets under Article 416.
In respect of stable funding, Article 413(1) of the CRR requiring stable funding will not come into effect until 1 January 2016 according to Article 521(2)(b). Currently, Article 427 and Article 428 of the CRR detail only the reporting of certain assets and liabilities that may form items for the calculation of stable funding once factors for Available Stable Funding and Required Stable Funding have been decided.
Update 26.03.2021: This Q&A has been archived as the issue it deals with is addressed in Q&A 2014_1089.