For the instruments listed in Article 197 of Regulation (EU) No. 575/2013 (CRR), is it possible to use the issuer rating in order to derive eligibility (and haircuts) where no specific instrument rating exists (“substitution”)?
Reading Article 197 of the CRR literally, only instruments issued by issuers as defined within Article 197 can be used for credit risk mitigation techniques (CRMT) purposes if the instruments as such have a credit risk assessment. Neither the rating of the issuer (e.g. governmental rating) nor a credit risk assessment of a specific issuing programme of that issuer would qualify for the eligibility of that (unrated) instrument. The wording of Article 197 CRR is quiet narrow. However it refers to country ratings based on OECD rules which are always given on issuer and country base only, and which are never related to any debt instrument. Governmental issuers often rely in their debt issuance either on the governmental rating or dedicated program rating (e.g. short term Treasury bills etc.). As such it is quiet common that governmental bonds and short term debt securities are not rated (e.g. Luxemburg central government bonds, Dutch treasuries etc.). Not allowing the usage of such collateral for CRMT for solvency and large exposure purposes would substantially limit the pool of available high quality collateral without properly reflecting the underlying risk mitigation. We kindly ask to allow the proper substitution as described above to fulfil the eligibility criteria as defined within Article 197 of the CRR, even for issues without a rating.
Article 197(1)(b) of Regulation (EU) No 575/2013 (CRR) states that institutions may use debt securities issued by central governments as eligible collateral for the purposes of credit risk mitigation provided that those securities "have a credit assessment by an ECAI or export credit agency recognised as eligible for the purposes of Chapter 2" and the credit assessment at least meets a certain floor (i.e. at least credit quality step 4).
At the same time, Article 139(2) of the CRR provides that in case where a "specific issuing programme or facility to which the item constituting the exposure belongs" does not have a specific credit assessment, but a general credit assessment exists for the issuer, then that credit assessment must be used if certain conditions are met.
Reading the two Articles in conjunction (not doing so would introduce an asymmetry in the treatment of exposures and eligible collateral that does not appear justifiable from a prudential perspective) it follows that a debt security, which is issued by a central government and which does not have a credit assessment, can be considered as eligible collateral if all the following conditions are met:
Furthermore, taking into account Article 197(2) of the CRR, the above treatment can also be applied to debt securities listed in points (a) to (d) of that paragraph.
This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Internal Market and Services) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.
Update 26.03.2021: This Q&A has not yet been reviewed by the European Commission in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).