Cash collateral posted under two-way CSA agreements in relation to currency forward contracts

• Question ID: 2018/0013
• Date of publication: 24/01/2018
• Subject matter: Instruments in the scope of AnaCredit, Protection items in AnaCredit, Current accounts - deposits and overdrafts
• AnaCredit Manual: Part II

Question

We understand that “currency forward” contracts (as over-the-counter contracts) are not covered by the AnaCredit reporting requirements. However, could you please clarify whether cash collateral posted under two-way credit support annex (CSA) agreements with other financial institutions in relation to currency forward contracts is subject to AnaCredit reporting?

Answer

It is true that, being derivatives, currency forward contracts are not subject to AnaCredit reporting, as they are not one of the types of instrument referred to in Article 1(23) of the AnaCredit Regulation.

However, where a forex contract (or a transaction in financial derivatives more generally) involves a party requiring a deposit to compensate for the risk of non‑delivery/non-settlement, it should be noted that repayable margin payments deposited in cash by the reporting agent under such agreements generally constitute instruments in the context of AnaCredit. Depending on the nature of the counterparty, the cash is classified as “deposits other than reverse repurchase agreements” (if the cash is deposited with an MFI) or “other loans” (if it is deposited with a non-MFI).

However, the financial derivative itself does not serve as protection for the instrument (i.e. the repayable margin payment) and is not, therefore, reported to AnaCredit. (The financial derivative does not constitute “protection” as defined by Article 1(24) of the AnaCredit Regulation, as it does not serve as insurance against a negative credit event in relation to the repayable margin payment.) This also applies to forex forwards.

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See also Cash posted as collateral being an instrument in AnaCredit, Negative market value as protection for cash collateral?