Trade exposures to Qualifying Central Counterparties and collateral substitution

In case the original exposure is fully exempt from the application of the large exposure limit based on Art. 400 (1) (j) CRR as a trade exposure to a QCCP, no calculation of an exposure “after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403” for purposes of the large exposure limit pursuant to Art. 395 (1) CRR takes place. Is accordingly a substitution of an exposure amount to the issuer of a security not required when the trade exposure to the QCCP is collateralised with the security, as the original exposure is fully exempt from the large exposure limit?

If for example an institution as clearing member enters into a reverse-repo transaction with a qualifying central counterparty (QCCP) in the meaning of Art. 4 (1) (88) CRR, then this trade exposure in the meaning of Art. 4 (1) (91) CRR is fully exempt from the application of the large exposure limit based on Art. 400 (1) (j) CRR.  The calculation of exposures after taking into account the effect of the credit risk mitigation is only required for the determination of the large exposure limit utilisation pursuant to Art. 395 (1) CRR (aside from mere reporting purposes (Art. 394(1) CRR) which are not the focus of this question and just mentioned for the sake of completeness).  Art. 395 (1) CRR states that “An institution shall not incur an exposure to a client or group of connected clients the value of which exceeds 25 % of its Tier 1 capital, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403 ”. The reference to Art. 401 CRR clarifies that the collateral substitution is required for the purposes of CRR Art. 395(1) CRR. Art. 401 (4) CRR states: “ Where an institution reduces an exposure to a client using an eligible credit risk mitigation technique in accordance with Article 399(1), the institution […] shall treat the part of the exposure by which the exposure to the client has been reduced as having been incurred for the protection provider rather than for the client”. CRR Art. 400(1) provides for certain exemptions from the application of Art. 395 (1) CRR: “The following exposures shall be exempted from the application of Article 395 (1) : […]”.  In case of fully exempted exposures (e.g. trade exposures facing QCCPs), no limit utilisation according to Art. 395 (1) CRR is calculated. Illustrative example: In the following the example of a reverse-repo is used and it is assumed that there are no other exposures towards the QCCP and the issuer of the security leg of the reverse-repo. Example: A reverse-repo where an institutions as clearing member provides cash in the amount of 100 to a QCCP in return for a security with market value 105 and an applicable haircut of 10% for the purposes of Art. 220 CRR (assuming that there are no other exposures towards the QCCP and the issuer of the collateral).