EBA · 2015_1776 Final Q&A

Credit Risk Mitigation

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
197, para. 1
Topic
Credit risk
Submitted by
Accounting firm
Submitted
2015-02-02
Answered
2015-07-10
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Can an institution legally "ring fence" cash it has to mitigate an exposure to a counterparty (using it as financial collateral)? The institution does not wish to notify the counterparty. The CRR is not clear on whether financial collateral used to mitigate an exposure must come from the counterparty or not.

Background

An institution wishes to mitigate an exposure they have. They wish to do this without involving or notifying the counterparty. They are not permitted to receive guarantees from their parent or to have an asset exposure to their parent as part of their license condition.

Answer

Cash used to mitigate an exposure pursuant to Article 197(1)(a) of Regulation (EU) No 575/2013 (CRR) must constitute a 'funded credit protection' as defined in Article 4(58) of the CRR. As such, Article 4(57) of the CRR states that this 'credit risk mitigation [...][is] used by an institution to reduce the credit risk associated with an exposure'. Given that the cash described in the question comes from the institution itself, it does not provide any credit risk reduction. Therefore, such cash is not a 'funded credit protection' and as a result, is not eligible under Article 194(3) of the CRR. Regarding the specific case of cash, Article 197(1)(a) of the CRR that specifies the eligibility of collateral under all approaches and methods, refers to 'cash on deposit', making it clear that cash collateral should be received by the institution.

Original source: European Banking Authority, Q&A ID 2015_1776

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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