Question ID
2023_6800
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Supervisory reporting - Asset Encumbrance
Article
430
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Regulation (EU) 2021/451 – ITS on supervisory reporting of institutions
Article/Paragraph
.
Type of submitter
Credit institution
Subject matter
Should collateral received via securities financing transaction that is subsequently sold short be reported as encumbered in F32.02? Follow-up question on 2014_946 related to short positions in Asset Encumbrance
Question

As clarified in Q&A 946 “Selling collateral received (short sale) does not give rise to encumbrance”. Two scenarios are addressed under this Q&A and further clarity is sought on scenario one and the reporting of collateral received in template F 32.02 where such collateral is subsequently sold short. Is it the intended view that within F 32.02 where an institution receives collateral, against cash, and then uses that collateral received to cover a short position, that the received collateral should be reported as unencumbered in F 32.02, column 040?  If so, can you please provide supporting rationale that selling collateral received (short sale) does not give rise to encumbrance given that once the collateral is sold short, it is not available for re-use by the institution?

Background on the question

Refer to Q&A 946. The answer provided under Q&A 2014_946 makes a distinction between two scenarios on how to report collateral received in Asset Encumbrance (1) Where the collateral is used on short sale and (2) Where the collateral is reused in a transaction giving rise to encumbrance. The conclusion from the two scenarios is that scenario (1) is beneficial to the Asset encumbrance ratio as the collateral received that is sold short is not recognised as encumbered on F 32.02. We seek to confirm whether the intended approach on F 32.02, for the collateral received that is sold short, is to report this as unencumbered.

Submission date
Final publishing date
Final answer

In accordance with the general instructions in section 1.7 (Definition of Encumbrance) of Annex XVII of the ITS No 451/2021 on asset encumbrance reporting under Article 430 of Regulation (EU) No 575/2013, it is outlined that an asset shall be treated as encumbered if it has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn.

The ITS further clarifies that the definition is not based on an explicit legal definition, such as title transfer, but rather on economic principles, as the legal frameworks may differ in this respect across countries.

A collateral received via securities financing transactions that is subsequently sold short does not give rise to encumbrance, as explained in the Q&A 2014_946. Neither it could be reported as unencumbered, since it is not possible for the institution to reuse or repledged it in other transactions.

After the short sale of the collateral received, the instructions written in the scenario (1) of Q&A 2014_946 should be followed. As a consequences, in such a case the item of collateral ceases to be reported in template F 32.02.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.

Disclaimer

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