Credit Risk Mitigation Specification¶

Collateral haircuts, overcollateralisation, FX mismatch, maturity mismatch, and guarantee substitution.

Regulatory Reference: CRR Articles 192-241

Test Group: CRR-D

Requirements Status¶

Collateral Haircuts (CRR Art. 224)¶

Financial Collateral¶

Government Bonds (by CQS and Residual Maturity)¶

Corporate Bonds (by CQS and Residual Maturity)¶

Equity¶

Non-Financial Collateral¶

FX Mismatch Haircut (CRR Art. 233)¶

When collateral currency differs from exposure currency: 8% additional haircut.

Overcollateralisation (CRR Art. 230)¶

Non-financial collateral requires overcollateralisation to receive credit risk mitigation benefit.

Overcollateralisation Ratios¶

The effectively secured amount is:

effectively_secured = adjusted_collateral_value / overcollateralisation_ratio

Minimum Coverage Thresholds¶

If the minimum threshold is not met, the non-financial collateral value is set to zero (no CRM benefit).

Maturity Mismatch Adjustment (CRR Art. 238)¶

When collateral maturity is shorter than exposure maturity:

adjustment_factor = (t - 0.25) / (T - 0.25)

Where t = residual collateral maturity (years), T = min(residual exposure maturity, 5) years.

No adjustment when:

• Collateral residual maturity ≥ exposure residual maturity (no mismatch), or
• Collateral residual maturity < 3 months (protection disallowed — collateral value zeroed)

Multi-Level Collateral Allocation¶

Collateral is allocated at three levels, distributed pro-rata:

1. Exposure level - Collateral pledged directly against an exposure
2. Facility level - Collateral pledged against a facility, shared across its exposures
3. Counterparty level - Collateral pledged against a counterparty, shared across all exposures

Financial and non-financial collateral are tracked separately to apply the correct overcollateralisation ratios and minimum thresholds.

Guarantee Substitution (CRR Art. 213-217)¶

Approach¶

The guarantor's risk weight replaces the borrower's risk weight for the guaranteed portion of the exposure, but only when this is beneficial.

Application Logic¶

1. Look up the guarantor's risk weight based on entity type and CQS
2. Compare to the borrower's risk weight
3. If guarantor RW < borrower RW, apply substitution on the guaranteed portion
4. If guarantor RW ≥ borrower RW, no substitution (guarantee is non-beneficial)

Blended Risk Weight¶

For partially guaranteed exposures:

RW_blended = (unguaranteed_portion x borrower_RW + guaranteed_portion x guarantor_RW) / EAD

Tracking Fields¶

The calculator tracks pre- and post-CRM values for audit:

• pre_crm_counterparty_reference / post_crm_counterparty_guaranteed
• pre_crm_exposure_class / post_crm_exposure_class_guaranteed
• guaranteed_portion / unguaranteed_portion
• is_guarantee_beneficial

Cross-Approach CCF Substitution (CRR Art. 153(3))¶

When an IRB exposure is guaranteed by a counterparty under the Standardised Approach, the guaranteed portion uses SA CCFs instead of IRB supervisory CCFs.

Guarantor Approach Determination¶

The guarantor's approach is "sa" when: - The firm lacks IRB permission for the guarantor's exposure class, OR - The guarantor has only an external rating (no internal PD)

The guarantor's approach is "irb" only when both conditions are met: - The firm has IRB permission for the guarantor's exposure class, AND - The guarantor has an internal rating with PD

EAD Split¶

ead_guaranteed = guarantee_ratio × (drawn + undrawn × ccf_sa)
ead_unguaranteed = (1 - guarantee_ratio) × (drawn + undrawn × ccf_irb)

Output Fields¶

• ccf_original, ccf_guaranteed, ccf_unguaranteed
• guarantee_ratio, guarantor_approach, guarantor_rating_type

Provision Resolution (Before CRM)¶

Provisions are resolved before the CRM waterfall (and before CCF application). See Provisions Specification for the drawn-first deduction approach and multi-level beneficiary resolution. The CRM waterfall (collateral → guarantees) operates on the provision-adjusted EAD.

CRM Method Selection (PRA PS1/26 Art. 191A)¶

Basel 3.1 introduces a formal decision tree framework for CRM method selection (Appendix 1):

Part 1 — Funded CRM with CCR Exposure¶

CCR exposures → IMM / SFT VaR Method / Financial Collateral Comprehensive Method / Financial Collateral Simple Method (SA only)

Part 2 — Funded CRM without CCR¶

1. On-balance sheet netting → Art. 219
2. Financial collateral → Comprehensive Method (Art. 223) or Simple Method (Art. 222, SA only)
3. Immovable property / receivables / other physical → Foundation Collateral Method (Art. 229-231, IRB only)
4. Life insurance / instruments from institutions → Other Funded Protection Method (Art. 232)

Part 3 — Unfunded CRM¶

• SA / Slotting → Risk-Weight Substitution Method (Art. 235)
• FIRB / AIRB → Parameter Substitution Method (Art. 236)
• AIRB (own estimates) → LGD Adjustment Method (Art. 183)

Part 4 — Unfunded Covered by Funded¶

Nested application of Parts 1-3 where unfunded protection is itself collateralised.

Financial Collateral Simple Method (Art. 222)¶

SA-only method. The risk weight of the collateral substitutes for the exposure risk weight on the secured portion:

• Floor: 20% minimum risk weight (except qualifying repo-style transactions: 0%)
• Eligibility: Collateral must be eligible financial collateral per Art. 197
• Maturity: Collateral maturity must cover exposure maturity (no mismatch allowed)
• Formula: RW_secured = max(20%, RW_collateral), RW_unsecured = RW_obligor

The calculator uses the Financial Collateral Comprehensive Method by default.

Parameter Substitution Method (Art. 236)¶

IRB-only method for unfunded credit protection (guarantees and credit derivatives):

• Covered portion: Uses protection provider's PD with exposure's LGD
• FIRB: covered LGD = supervisory LGD for senior unsecured claim on guarantor
• AIRB: covered LGD = own LGD estimate for senior unsecured claim on guarantor
• Uncovered portion: Uses obligor's own PD and LGD
• Expected loss: EL_covered = PD_guarantor × LGD_covered, EL_uncovered = PD_obligor × LGD
• Double recovery constraint: Combined coverage from funded + unfunded cannot exceed 100%

Unfunded Credit Protection Transitional (Rule 4.11)¶

Pre-existing unfunded credit protection (guarantees/credit derivatives) issued before 1 January 2027 may continue to use CRR treatment until 30 June 2028, provided: - The protection was in place and eligible under CRR as at 31 December 2026 - The protection has not been restructured or materially changed after 1 January 2027

Key Scenarios¶

Acceptance Tests¶