The issues surrounding this question are significant, since the collateral posted by investment firms on derivative clearing arrangements carries a credit risk that is not clearly captured in capital requirements, as the current text of the IFR stands.

The K-TCD factor is dedicated to counterparty credit risk. Its calculation, outlined in Article 26 and performed at the clearing set level, involves the Exposure Value (EV), which is determined according to the formula cited in Article 27.

This formula involves current exposure (considering replacement cost on the one hand and collateral on the other) to which potential future exposure (PFE) is added.

While current exposure is typically defined as the algebraic sum of:

(i) the total Mark-to-Market (MtM) of the clearing set, and

(ii) collateral (positive if received, negative if posted),

Article 30(2)(a) of IFR – applicable to derivatives – only mentions received collateral, omitting any reference to posted collateral (unlike the treatment for credit institutions under CRR Article 276, where the sign of collateral is explicitly addressed). However, Article 30(2)(b) explicitly addresses cases where collateral is posted rather than received, impacting how haircuts are applied.

Consequently, for investment firms, when a margined derivatives clearing set has a negative MtM against a counterparty, any collateral posted to that counterparty is excluded from the Exposure Value (EV) calculation. 

Moreover, the exposure value – and therefore the K-TCD – will even be zero when its PFE component is less than the absolute value of the clearing set’s MtM.

Illustrative Example:

Consider a simplified derivatives clearing set under a bilateral margin agreement (e.g., Golden CSA) with daily margining from the first euro. Assume:

• Clearing set MtM: –100 MEUR (in favour of the counterparty),

• Investment firm has posted 100 MEUR cash collateral (EUR),

• PFE of the clearing set: 80 MEUR.

According to a literal interpretation of the text of IFR, the exposure value is calculated as follows:

EV = Max (0; - 100 (MtM) + 0 (collateral received) +80 (PFE)) = 0

In line with CRR, or extrapolating paragraph 2.b to paragraph 2.a of Article 30 of the IFR, the exposure value would be: 

EV = Max (0; -100 (MtM) +100 (collateral posted) +80 (PFE)) = € 80 million.

In this example, we observe that there is a reduction of €80 million in the investment firm's exposure.