We are aware of differing interpretations by market participants in relation to the answers given under EBA Single Rulebook Q&A 2013_206 and 2016_2735 on the application of Collateral Received to achieve further credit risk mitigation to the extent that Collateral Received exceeds the net replacement cost, RC net.
For collateral received to reduce Net Replacement Cost, RC net, can surplus collateral be used to offset the reduced potential future credit exposure, PCE red, or may EAD, RC net + PCE red be further offset by any surplus Collateral Received that has not been applied in the RC net calculation?
Taking into account the requirements of REGULATION (EU) No 575/2013 Part THREE, TITLE II, Chapter 2 Standardised approach Article 111, Chapter 4 Credit Risk Mitigation and Chapter 6 Counterparty Credit Risk:
One reading is that, based on Q&A 206, Collateral Received may be applied to reduce Net Replacement Cost, RC net, but any surplus collateral cannot be used to offset the reduced potential future credit exposure, PCE red.
The alternative reading is that EAD, RC net + PCE red, may be further offset by any surplus Collateral Received that has not been applied in the RC net calculation.
Q&A 206 only refers to the impact of Collateral Received on the net replacement cost while the example given in response to Q&A 2735 has Collateral Received of nil.
In general, institutions using the “Mark-to-Market Method” according to Article 274 CRR can recognise collateral in either or both of the following ways:
However, in any case the same collateral cannot be recognised twice.
More specifically, Q&A 206 clarifies that net replacement cost shall be obtained by considering all mutual claims subject to the netting agreement. Thus collateral received can reduce the net replacement cost under the mark-to-market method obtained according to Article 298 (1)(c)(i) CRR.
Q&A_2735 states that the same applies to the calculation of the net-to-gross ratio in Article 298(1)(c)(ii). Thus collateral received can also reduce the reduced potential future exposure via the net-to-gross ratio.
Any collateral surplus, that is financial collateral received that has not been used in the net replacement cost calculations of the mark-to-market method above, can be recognised as a credit risk mitigant to reduce the exposure value of the derivative transactions by applying the financial collateral comprehensive method according to Article 223 CRR.
Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 298 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.