According to Article 429b(2) and (3) of Regulation (EU) No 575/2013 (CRR), as amended by the Delegated Regulation (EU) 2015/62, the add-on for counterparty credit risk is – in simple terms – calculated based on Ei – Ci (fair value of securities or cash lent and fair value of the collateral received respectively).
Article 429b(4) CRR states that, by way of derogation from paragraph 1 of this article, in certain circumstances institutions may use the method set out in Article 222 CRR (that is, the Financial Collateral Simple Method), subject to a 20% floor for the applicable risk weight.
Example (repurchase transaction):
Security value: 1025, cash received: 1000
Add-on according to Article 429b (2) CRR = 1025 – 1000 = 25
It is unclear whether under Financial Collateral Simple Method the add-on is 25 or whether it should be based on (1025 * 0.20) = 205 – 200 (1000 * 0.20), that is 5.
For the purpose of determining the add-on for counterparty credit risk in order to calculate the leverage ratio exposure of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions in terms of Article 429b(1) of Regulation (EU) No 575/2013 (CRR), as amended by Regulation (EU) 2015/62, under Article 429b(4) institutions may use the method set out in Article 222 CRR – subject to a 20 % floor for the applicable risk weight – if they also use this method for determining the exposure value of those transactions for the purpose of meeting the own funds requirements as set out in Article 92 CRR.
According to Article 222(3) CRR, in the case of those portions of exposure values that are collateralised by the market value of eligible collateral, the risk weight shall be at least 20% except as specified in paragraphs 4 to 6 where under certain conditions institutions may apply lower risk weights. In the case at hand, this holds especially true for repurchase transactions and securities lending or borrowing transactions which fulfil the criteria in Article 227 as specified in Article 222(4) CRR. However, this reduction of risk weights is overruled by Article 429b(4) CRR, as the derogation is subject to a 20% floor, and thus does not apply in this respect.
As a consequence the risk weight of 20% has to be applied with regard to the collateralised portion of the total exposure (Article 222(3) CRR).
In addition, in the case of those portions of exposure values that are not collateralised by the market value of eligible collateral institutions shall apply the risk weight that they would assign to an unsecured exposure to the counterparty (Article 222(3) CRR), and in accordance with Article 429b(4) this is also subject to a 20% floor.
Accordingly, regarding the numerical example in the question section of this Q&A, supposing that the security value is 1025 and the collateral value is 1000, this would result in two components in terms of Article 429b(4) CRR: An exposure value for the unsecured part and an exposure value for the secured part, which both have to be summed up. The former would be 25 multiplied by the risk weight that would be applicable to an unsecured exposure to the counterparty under Chapter 2 of the CRR, but at least 20% (e.g. 25 * 20% = 5). The latter would be 1000 multiplied by the risk weight that would be applicable under Chapter 2 of the CRR where the lending institution had a direct exposure to the collateral instrument, but – again – at least 20% (e.g. 1000 * 20% = 200). Thus, the add-on for counterparty credit risk calculated in accordance with Article 429b(4) CRR would be at least 205 (200 + 5).