| (1) | A licensed central counterparty may, if its exposure or potential exposure to credit risk is secured by a pledge or cession in securitatem debiti of eligible collateral as specified in Regulation 26.6(1), recognise the effect of such collateral using the Comprehensive Approach; provided that it complies with the requirements specified in this Regulation. |
| (2) | A reduction in the risk exposure of a central counterparty is allowed to the extent that— |
| (a) | such collateral was not already taken into account in the calculation of the central counterparty’s risk exposure3; |
| (b) | the central counterparty complies with the relevant requirements relating to disclosure, prescribed in Regulation 17; |
| (c) | the central counterparty is able to establish title to the collateral in order to liquidate it; and |
| (d) | such collateral can be realised by the central counterparty under normal market conditions, that is, the value at which the collateral can be realised in the market does not materially differ from its book value, provided that a central counterparty must maintain an appropriate margin of collateral in excess of the amount in respect of which a reduction in the risk exposure is allowed in order to provide for fluctuations in the market value of the relevant collateral. |
| (3) | When the collateral is held by a custodian, the central counterparty must— |
| (a) | ensure that the custodian ensures adequate segregation of the collateral instruments and the custodian's own assets; |
| (b) | in cases of uncertainty, obtain legal certainty by way of legal opinions confirming the enforceability of the collateral arrangements in all relevant jurisdictions, and that the central counterparty’s rights are legally well founded; and |
| (c) | update legal opinions at appropriate intervals in order to ensure continued enforceability. |
| (4) | The collateral arrangements must be duly documented with a clear and robust procedure in place for the timely liquidation of collateral. |
| (5) | A central counterparty's procedures must be sufficiently robust to ensure that any legal conditions required for declaring the default of the clearing member and liquidating the collateral are observed. |
| (6) | In order for collateral to provide effective protection, the credit quality of the obligor and the value of the collateral may not have a material positive correlation. |
| (7) | A maturity mismatch occurs when the residual maturity of the credit protection obtained in the form of eligible collateral or in terms of a netting agreement, is less than the residual maturity of the underlying credit exposure and must be treated in accordance with the relevant provisions specified in Regulation 26.7(18). |
| (8) | The rating issued in respect of the collateral instrument may not relate only to the principal amount. |
3 For example, no reduction in the risk exposure of the central counterparty shall be allowed in respect of an exposure for which an issue specific rating was issued, which rating already reflects the effect of the risk mitigation.
