Under the Capital Accord, a bank may assign the portion of a claim or credit equivalent amount collateralised by cash or OECD government securities to the zero percent risk category. Likewise, a participant in a multilateral netting arrangement would be able to assign the portion of its credit equivalent amount that is supported by collateral to the zero percent risk category. However, for multilateral systems where all participants post collateral in a pool, the reporting bank must be able to determine what portion, or percentage, of the collateral pool it would have a claim on in the event another participant defaulted. In other words, the bank must be able to identify the extent to which collateral is available to cover its credit exposure. If collateral has been posted by all banks participating in the multilateral system but the reporting bank cannot identify what percentage of the collateral, if any, it would be entitled to recover to satisfy its losses, the reporting bank would not be able to determine what portion of its credit equivalent amount is covered by collateral. Accordingly, it would be problematic to permit a reduced risk-weight for an unidentifiable portion of a credit equivalent amount

Against this background, the following guidelines will be applied when assessing the extent to which collateral may be taken into account:

(1) Current exposure

Under a partially or fully collateralised system, members must cover part or all of the exposure, respectively, they present to the clearing house through collateral. This collateral pool in turn reduces the loss amount that the clearing house would allocate to the survivors, thus lowering a participant's current exposure in the same proportion. For a supervisor to recognise a corresponding reduction in current exposure for a clearing house participant, the following additional criteria would have to be met:

the collateral carries a zero percent risk weight under the Capital Accord;

the collateral is only available to cover forward replacement risk (and not, for example, settlement risk);

a participant can determine how much of the collateral pool posted with the clearing house is available to reduce current exposure.

To the extent that participants fully collateralise the exposure they present to the clearing house and all of the above criteria are met, then participants could risk weight the current exposure portion of the credit equivalent amounts at zero percent.

(2) Potential future exposure

If all participants fully collateralise on a daily basis the exposure they present to the clearing house, the calculation for potential future credit exposure could be waived, provided that a number of conditions, in addition to those presented in (1) above, are met. In particular, the market value of the collateral held by the clearing house must be sufficient to cover potential increases in its exposure to each of the participants on an ongoing basis and at a high level of probability. The market value of the collateral would also have to be sufficient to cover a build-up of potential losses to the clearing house resulting from the inability to quickly replace or close out the positions of a defaulting participant. In addition, the collateral would have to cover potential losses over a sufficiently long holding period to account for the settlement cycle associated with the receipt of collateral (i.e., in certain cases it may take more than one day for collateral to be posted). These criteria may require the application of a holding period of a number of days. Moreover, the adequacy of the amount of collateral posted needs to be reviewed, and if necessary, adjusted on at least a daily basis.

The appropriate treatment of potential future exposure under a partially collateralised system is more complex and depends on the specific nature of the collateral scheme of the clearing house. In general, however, the criteria of the previous paragraph would be applied to that portion of potential future exposure that is covered by collateral.

For example, if participants were required to maintain an absolute level of collateral independent of the fluctuation of the exposure that they present to the clearing house, it may be justified to provide for a reduction in current exposure but to maintain the full capital charge for potential future exposure. On the other hand, if a participant's exposure to the clearing house is subject to a fixed limit (e.g. a net debit cap) and the absolute level of collateral is equal to or greater than this limit, then the capital charge for potential future exposure could be waived.

Another possibility is that the clearing house requires participants to maintain collateral in a fixed proportion to the exposure that they present to the clearing house. In this case a reduction in the capital requirement for potential future exposure proportional to the level of collateralisation may be justified, subject to satisfaction of the other criteria discussed in this section.