Consideration of surplus collateral received in providing further credit risk mitigation

In general, institutions using the “Mark-to-Market Method” according to Article 274 CRR can recognise collateral in either or both of the following ways: replacement cost calculation under the mark-to-market method, application of credit risk mitigation techniques. However, in any case the same collateral cannot be recognised twice. More specifically, Q&A 206 clarifies that net replacement cost shall be obtained by considering all mutual claims subject to the netting agreement. Thus collateral received can reduce the net replacement cost under the mark-to-market method obtained according to Article 298 (1)(c)(i) CRR. Q&A_2735 states that the same applies to the calculation of the net-to-gross ratio in Article 298(1)(c)(ii). Thus collateral received can also reduce the reduced potential future exposure via the net-to-gross ratio. Any collateral surplus, that is financial collateral received that has not been used in the net replacement cost calculations of the mark-to-market method above, can be recognised as a credit risk mitigant to reduce the exposure value of the derivative transactions by applying the financial collateral comprehensive method according to Article 223 CRR.