Conditions for application of 4% risk weight

Article 305, together with Article 306 of Regulation (EU) No. 575/2013 (CRR), allow a preferential treatment for client exposures towards a QCCP provided certain eligibility criteria are fully or partially met. Article 305(2)(a) contains a core criteria that explicitly requests that: "the positions and assets of that institution related to those transactions are distinguished and segregated, at the level of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote in the event of the default or insolvency of the clearing member or one or more of its other clients;" Therefore, the CRR clearly requires use of a clearing account that provides at least an equivalent level of client protection as individual client segregation. In order to benefit from the 2% risk weight the client must not be exposed to risk arising other than from its own positions and assets.  If the client is exposed to a double default of its clearing member and another client, or to a loss of value of other clients' collateral, then it should not benefit from the 2% weighting. 'Asset-tagging' or 'good individual asset attributions' do not necessarily guarantee this condition nor the other conditions laid down in Article 305(2) of the CRR in practice. In the instance where a client faces fellow client risk, as described in Article 305(3) of the CRR, where an institution that is a client is not protected from losses in the case that the clearing member and another client of the clearing member jointly default, they may benefit from the 4% risk weight so long as all other conditions of Article 305(2) are met. This would also include the condition that the positions and assets of that institution related to their CCP-related transactions are still distinguished and segregated at the level of both the clearing member and CCP, from the positions and assets of both the clearing member and the other clients of that clearing member. Following this, gross omnibus segregation (legal segregation & operational comingling) may be an acceptable level of segregation for institutions if they can demonstrate to offer the aforementioned level of protection. Where the conditions of Article 305(2) or (3) of the CRR are not met, the institution shall calculate the own funds requirements in accordance with Article 305(1).