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Credit risk mitigation techniques and netting agreements

Credit risk mitigation techniques and netting agreements Article 192-241 CRR

The term "credit risk mitigation techniques" refers to institutions' collateral agreements that are used to reduce risk arising from credit positions. Part 2 Chapter 5 of the Solvency Regulation specifies whether and to what extent collateralisations are recognised.

In addition to financial collateral and guarantees of recognised protection providers, which all institutions may recognise, assignments of claims or physical collateral also count as risk mitigants when institutions use an IRBA (so-called IRBA institutions). Where Advanced IRBAs are used, the range of eligible collateral is even unlimited provided an institution can present reliable estimates of the value of the asset. For credit risk mitigation techniques to be recognised when calculating minimum capital requirements, however, institutions must comply with certain minimum qualitative requirements which are explicitly specified in the Solvency Regulation.

On condition that an eligible netting agreement has been concluded bilaterally with the respective contractual partner, derivative and non-derivative transactions with remargining (mostly repurchase and lending transactions) can, according to the provisions of the Solvency Regulation, be netted against one another. On-balance-sheet netting of mutual money claims and debts is also permitted. Moreover, if a cross-product netting agreement is in effect, institutions may take account of netting effects in the case of risk exposures from different product categories. Thus, it is permissible to net derivative counterparty credit risk exposures against non-derivative transactions with remargining or other repurchase, lending or comparable agreements involving securities or commodities. However, for such cross-product netting agreements, the use of the Internal Model Method, as the most risk-sensitive of all methods, is mandatory.

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