Covered bonds are normally hedged with swaps, especially for currency risk and especially by issuers outside the Eurozone when issuing in EUR (issuers in Norway for example).   When collateral posting by the covered bond issuer's swap counterparty is subject to contract (ISDA Schedule and CSA), we think that the word "exposure" in CRR Art 129 1 (c) should also include or regard collateral held from the swap counterparty.   

With regards to covered bond swaps, the Regulation (EU) 2016/2251, Article 30 1 (a) is important in this context.  Here it is regulated that when covered bond swaps are not centrally cleared, but are OTC swaps (as must be the case with all currency swaps), variation margin in the form of cash must be collected from the swap counterparty. 

A sole focus on the covered bond swap counterparty's Credit Quality Step with no regard for the collateral posted by this counterparty to the covered bond issuer (cover pool) neglects the underlying economic reality when it comes to exposure.  This subject matter is important if a bank, which is a cover bond swap counterparty, is downgraded to CQS3 during a running swap contract.  That would mean that such a counterparty must be replaced to fulfill CRR Art 129, unless the national regulator has allowed CQS3 due to concentration issues in the market (however, the argument is not about allowing new derivatives contracts with CSQ3 counterparties, but what happens upon a downgrade to a counterparty in a running contract).  However, when such a swap counterparty has posted as collateral all mark-to-market amounts it owes under a swap contract in cash to the covered bond issuer, we  think that when assessing the covered pool's exposure, this should be included.  That is the essence of why collateral is posted.   Moody's rating methodology also requires a collateral buffer to be posted above the Mark-to-market exposure in such cases (swap counterparty loses a A3 rating), and many issuers are following this methodology.