On-balance sheet netting and exemption from the Large Exposures limits

The exemption from the large exposures regime as laid down in Article 400(1)(g) of Regulation (EU) No 575/2013 (CRR) refers to asset items and other exposures secured by collateral in the form of cash deposits placed with the lending institution or with an institution which is the parent undertaking or a subsidiary of the lending institution. The exception to the abovementioned article is that the exemption must fulfil the general requirements for the recognition of credit risk mitigation techniques under Part Three, Title II Chapter 4 of the CRR. In particular, Articles 195 and 219 of the CRR limit on-balance sheet netting to reciprocal cash balances denominated in the same currency between an institution and its counterparty that are subject to an on-balance sheet netting agreement. This exception is without prejudice to the rights of set-off associated with other transactions subject to an enforceable master netting arrangement as specified in Article 196 of the CRR. On-balance sheet nettings recognised under IFRS accounting rules are included in the exception specified in Article 400(1)(g) of the CRR. Maturity mismatches between loans and deposits are not relevant in this context. However, Article 205 of the CRR sets out the requirements for on-balance sheet netting arrangements, one of which is that institutions monitor and control the risks associated with the termination of the credit protection on an ongoing basis. Please note that different jurisdictions may have different rules regarding unconditional and legally enforceable rights of set-off, as well as intention either to settle the asset and liabilities on a net basis or to realize the asset and settle the liability simultaneously. These transactions would be considered as on balance sheet netting for the purpose of Article 400 on a case-by-case basis. Please see Q&A 2013_538 that refers to definition of counterparty for the purpose of applying on-balance sheet netting. See also Q&A 2014_1505 .