Under Substitution Approach, How to report the covered part of the exposure where collateral is Covered Bond.

The reporting of CRM techniques with substitution effect is explained in section 3.1.1. of Annex II to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting). According to paragraph 44, in the case of an exposure being secured by unfunded credit protection, the secured part is assigned as an outflow e.g. in the exposure class of the obligor (in the example in the question: ‘exposure to corporates’) and as an inflow in the exposure class of the protection provider. Paragraph 45 continues that the substitution effect shall reflect the risk weighting treatment effectively applicable to the covered part of the exposure and that the covered part of the exposure is therefore risk weighted according the SA approach and reported in template C 07.00 of Annex I to the ITS on Supervisory Reporting. The provisions of paragraphs 44 and 45 apply analogously to cases of funded credit protection, where the financial collateral is recognised according to the financial collateral simple method in accordance with Articles 222 (1) and (2) of Regulation (EU) No 575/2013, as in the example provided (exposure secured by a covered bond). Consequently the allocation of the secured part to an exposure class has to follow the decision tree of section 3.2.3 paragraph 64 et seq. of Annex II. In the example provided by the submitter, the secured part is secured by a covered bond issued by a rated institution. According to the decision tree, this secured part would be reported as an inflow in the exposure class ‘Exposures in the form of covered bonds (Article 129 of Regulation (EU) 575/2013)’.