5.1 Eligibility requirements for funded credit protection

In accordance with Article 181(1)(f) of Regulation (EU) No 575/2013, for the purposes of establishing internal requirements for legal certainty that are generally consistent with those set out in Chapter 4, Section 3 of Title II in Part Three of that Regulation, to the extent that LGD estimates take into account the existence of collateral, institutions should ensure that the collateral arrangement under which the collateral is provided is legally effective and enforceable in all relevant jurisdictions, giving the institution the right to liquidate or repossess the collateral in a reasonable timeframe, including in the event of the default, bankruptcy or insolvency of the obligor and, where applicable, of the custodian holding the collateral.

In accordance with Article 181(1)(f) of Regulation (EU) No 575/2013, for the purposes of establishing internal requirements for collateral valuation that are generally consistent with those set out in Chapter 4, Section 3 of Title II in Part Three of that Regulation, to the extent that LGD estimates take into account the existence of collateral, institutions should ensure that all the following conditions are met:

• (a) the rules governing the revaluation of the collateral, including methods and frequency of monitoring the value of the collateral, are consistent for each type of collateral and are specified in the internal policies of the institution;
• (b) where the market is subject to significant changes in conditions, institutions carry out more frequent monitoring.

For the purposes of Article 55 of the RTS on IRB assessment methodology and to ensure compliance with the general principles on legal certainty and collateral valuation in paragraphs 17 and 18, the internal requirements for legal certainty and collateral valuation established by institutions in accordance with Article 181(1)(f) of Regulation (EU) No 575/2013 should be fully consistent with the following requirements of Chapter 4, Section 3 of Title II in Part Three of that Regulation:

• (a) For financial collateral, they should be consistent with Article 207(3) and 207(4) letter (d) of that Regulation.
• (b) For immovable property collateral, and for lease exposures treated as collateralised where the asset leased is an immovable property, they should be consistent with Article 208(2) and (3) of that Regulation.

For the purposes of valuing an immovable property collateral and reviewing its value under the conditions specified in Article 208(3)(b) of that Regulation, institutions should ensure the following:

• (i) The immovable property collateral is valued by an independent valuer at or at less than the market value. In those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions, the property may instead be valued by an independent valuer at or at less than the mortgage lending value. Institutions should require the independent valuer not to take into account speculative elements in the assessment of the mortgage lending value.
• (ii) The independent valuer documents the market value or mortgage lending value in a transparent and clear manner.
• (iii) The value of the collateral is the market value or the mortgage lending value reduced as appropriate to reflect the result of the monitoring and to take into account any prior claims on the property.
• (iv) The independent valuer should possess the necessary qualifications, ability and experience to execute a valuation and should be independent from the credit decision process. As long as an employee of the institution meets all the aforementioned conditions, that employee can be considered an independent valuer.
• (c) For receivables, they should be consistent with Article 209(2) of that Regulation. The value of the receivable should be the amount receivable.
• (d) For other physical collateral, and for lease exposures treated as collateralised where the asset leased is other than immovable property, they should be consistent with Article 210(a) and (g) of that Regulation. For the purposes of conducting valuation and revaluation of the collateral in accordance with Article 210(g) of that Regulation, institutions should value physical collateral at its market value, which should be the estimated amount for which the collateral would exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction.
• (e) For other funded credit protection, they should be consistent with Article 212(1)(a) and Article 212(2)(f) of that Regulation.

Institutions should obtain a legal opinion confirming the legal effectiveness and enforceability of the collateral arrangement in all relevant jurisdictions for the purposes of paragraph 17. This legal opinion should be:

• (a) carried out at least for each type of collateral arrangement; and
• (b) provided in a written form by a legal counsel. Where the legal counsel is an employee of the institution, the legal counsel should be independent from the credit decision process responsible for originating or renewing the exposures under consideration.

For the purposes of paragraph 20, institutions may rely on a single legal opinion in relation to multiple collateral arrangements where it relates to the same applicable law. Institutions should obtain additional legal opinion relating to any substantive variation to the terms of the collateral arrangement that could affect the legal effectiveness and enforceability of the specific collateral arrangement. At a minimum, changes in the legal framework applicable to the collateral arrangements and application of the collateral arrangement to other types of exposures or to obligors classified to other exposure classes or to other types of obligors, meaning individual persons or legal entities, should always be considered cases of substantive variation to the terms of the collateral arrangement.

For the purposes of paragraph 20, institutions may rely on a single legal opinion covering several jurisdictions. In particular, where international regulations exist in the form of international law or another form of international agreement, the legal opinion may span some or all jurisdictions where these regulations are adopted. In this case, the legal opinion should at least:

• (a) consider whether the regulations ensure legal effectiveness and enforceability of the collateral in all jurisdictions in which the regulations are applicable;
• (b) clearly identify all jurisdictions in which the regulations are applicable;
• (c) clearly identify all forms of collateral that are subject to the regulations.

Institutions should ensure that they obtain the legal opinion or opinions in accordance with paragraph 20, confirming that the collateral arrangement under which the other physical collateral is provided is legally effective and enforceable at least in the following jurisdictions:

• (a) the jurisdiction whose law governs the collateral arrangement;
• (b) if a public register for the type of collateral exists, the jurisdiction where the collateral is registered; otherwise, the jurisdiction in which the owner of the collateral is incorporated or the place of residence if the owner of the collateral is a natural person;
• (c) if considered relevant for a given collateral, the jurisdictions in which the institution and the obligor are incorporated; in any case, if the obligor is a natural person, the jurisdiction of his or her place of residence;
• (d) the jurisdiction where it is most likely that the realisation of the collateral would be carried out should this be necessary;
• (e) any other jurisdiction, if considered relevant for a given collateral.