Although the question refers to collateral received by the reporting institution that is sold, the answer also addresses the case of received collateral that is reused in a transaction giving rise to encumbrance.

1) When an item of collateral received is sold the reporting entity is a short-seller, i.e. it sells a financial instrument it has borrowed and does not yet own):
Selling collateral received (short sale) does not give rise to encumbrance. In this case, according to IAS 39.37 (b), the reporting institution shall recognize the proceeds from the sale and a liability measured at fair value for its obligation to return the collateral (short positions are liabilities according to IFRS and should be reported in the template F 08.01 of FINREP).
In the templates on asset encumbrance, the transaction that allows the institution to receive the collateral and the sale of the collateral received shall be reported separately.

a) Before the sale, the collateral received shall be reported in the appropriate row of template F 32.02 columns c040 to c060. The securities borrowing transaction that allowed in the first place the reporting institution to receive the collateral shall be reported as provided for in paragraphs 14(iv) and 17 of Annex XVII of the ITS and specified by Q&A 2015_1852 for the cases where the collateral was borrowed against cash, a fee or another security;

b) After the sale, the item of collateral ceases to be reported in template F 32.02 and the proceeds from the sale is considered as cash on hand and reported in F 32.01, r120, c060. The securities lending transaction that allowed in the first place the reporting institution to receive the collateral shall however still be reported in accordance with paragraphs 14(iv) and 17 of Annex XVII of the ITS, as before the sale.

c) The proceeds from the sale is also reported in F 08.01, column 010, row r020 to r030 as appropriate. Nothing should be reported in template F 32.04, as the liability only represents the obligation to return the collateral, and not a source of encumbrance.

2) When an item of collateral received is re-used in a transaction that gives rise to encumbrance:
Collateral received and that are re-used shall be reported as encumbered only when this re-use gives rise to encumbrance according to the definition used in paragraph 11 of Annex XVII of Regulation (EU) No 680/2014 – ITS on Supervisory Reporting of institutions (ITS), that is the collateral received has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn. The definition of encumbered is not based on an explicit legal definition but rather on economic principles, although the definition is closely linked to contractual conditions.
In such cases, the following treatment applies:
• Before the re-use, the treatment described in 1)a) applies
• After the collateral is reused, the fair value of the encumbered collateral is reported in the appropriate row of template F 32.02, columns c010 to c030
• The fair value of the re-used collateral is reported in the appropriate row of template F 32.04. column c040
• The carrying amount of the associated liabilities r is reported in the appropriate row of template F 32.02, columns c010 and c020
• The securities lending transaction that allowed in the first place the reporting institution to receive the collateral shall still be reported in accordance with paragraphs 14(iv) and 17 of Annex XVII of the ITS, as before the re-use.