Article 27 of the IFR states that the amount of “collateral”, as determined in Article 30, can be deducted when calculating an exposure value for transactions subject to K-TCD and K-CON.

In turn, Article 30(1) determines that all collateral for both bilateral and cleared transactions referred to in Article 25 shall be subject to the volatility adjustments established in Table 4 of Article 30(1). It can be considered that the latter is setting out the asset classes that are eligible as collateral under the IFR.

However, Article 30(2), which specifically details how collateral should be valued, appears to apply only to collateral received from the direct counterparty to the transaction. This specification in Article 30(2) therefore raises the question whether it was intended to only permit collateral received directly from the counterparty to the transaction to be eligible when calculating an exposure value for transactions subject to K-TCD and K-CON or whether collateral received from third parties (i.e. protection providers) through funded credit protections would also be eligible.

Although Article 30(2), point (a), only refers to the amount of collateral received by the investment firm from its counterparty, it cannot be inferred from this that collateral received from a protection provider would not be eligible for the calculation of the exposure value under Article 27.

For determining whether collateral received from a protection provider would be eligible, the investment firm should obtain the legal certainty that it will be promptly transferred the property of the collateral in the case of default of the direct counterparty or that the pledged collateral will remain available in the case of default of the protection provider.

In principle, funded credit protections provided by third parties, whereby cash or securities are pledged in the name of the investment firm, which are available at first demand and without any restriction in the case of default of the direct counterparty could also be accepted as collateral under the IFR.

However, the IFR does not specify the eligibility criteria of a funded credit protection as collateral. For this assessment, investment firms could refer to the requirements set out in Regulation (EU) No 575/2013 (Capital Requirements Regulation or “CRR”), such as Article 212(1), as guidelines. On their side, competent authorities will assess the eligibility and the quality of this collateral as part of their Supervisory Review and Evaluation Process (SREP) and will consider whether any residual risk needs to be addressed through Pillar 2.

In this context, it is useful to note that unfunded credit protections and credit derivatives, or any other type of derivatives, received from counterparties, or third parties, are not eligible as collateral under the IFR. These instruments were not considered to be permissible by the legislator and therefore not listed in Table 4 of Article 30(1) of the IFR.

Disclaimer:

The answer clarifies provisions already contained in the applicable legislation. It does not extend in any way the rights and obligations deriving from such legislation; nor does it introduce any additional requirements for the concerned operators and competent authorities. The answer is merely intended to assist natural or legal persons; including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.