Recognition of collateral substitution rights in secured funding transactions

According to requirement of Article 7 of the Delegated Regulation (EU) 2015/61 with regard to liquidity coverage requirement (DR LCR), to be classified as a liquid asset, an asset should be unencumbered, i.e. not be subject to any legal, contractual, regulatory or other restriction preventing it from liquidating, selling, transferring, assigning or, generally, disposing of such asset via active outright sale or repurchase agreement. As clarified in Q&A 5475 , according to Annex XVII to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting) assets pledged that are subject to any restrictions in withdrawal, such as for instance assets that require prior approval before withdrawal or replacement by other assets, should be considered encumbered. Therefore, as long as the asset is pledged at reporting date it cannot  qualify as a liquid asset. However, collateral substitution results in an “other inflow” or “other outflow” amounting to the difference of the liquid values of the collateral involved as calculated according to Article 9 DR LCR respectively, if the posted collateral has been contractually recalled at reporting date and will be released and available to the institution within the next 30 days. If the posted collateral is not yet called back at reporting date: no inflow can be considered in case the liquid value of the collateral that can be called back is higher than the liquid value of the substitute collateral that would have to be provided, as contingent inflows must not be included in the LCR; the institution should consider the possibility of an outflow according to Article 23 DR LCR if there might be reputational reasons for calling back collateral with a lower liquid value than the liquid value of the substitute collateral that would have to be provided in case of stress.