By way of derogation from Article 2(2) and where the conditions set out in paragraph 2 of this Article are met, counterparties may, in their risk management procedures, provide the following in relation to OTC derivative contracts concluded in connection with covered bonds:

1. (a)

   variation margin is not posted by the covered bond issuer or cover pool but is collected from its counterparty in cash and returned to its counterparty when due;

2. (b)

   initial margin is not posted or collected.

Paragraph 1 applies where all of the following conditions are met:

1. (a)

   the OTC derivative contract is not terminated in case of resolution or insolvency of the covered bond issuer or cover pool;

2. (b)

   the counterparty to the OTC derivative concluded with covered bond issuers or with cover pools for covered bonds ranks at least pari passu with the covered bond holders except where the counterparty to the OTC derivative concluded with covered bond issuers or with cover pools for covered bonds is the defaulting or the affected party, or waives the pari passu rank;

3. (c)

   the OTC derivative contract is registered or recorded in the cover pool of the covered bond in accordance with national covered bond legislation;

4. (d)

   the OTC derivative contract is used only to hedge the interest rate or currency mismatches of the cover pool in relation to the covered bond;

5. (e)

   the netting set does not include OTC derivative contracts unrelated to the cover pool of the covered bond;

6. (f)

   the covered bond to which the OTC derivative contract is associated meets the requirements of paragraphs (1), (2) and (3) of Article 129 of Regulation (EU) No 575/2013;

7. (g)

   the cover pool of the covered bond to which the OTC derivative contract is associated is subject to a regulatory collateralisation requirement of at least 102 %.

By way of derogation from Article 2(2) and where the conditions set out in paragraph 2 of this Article are met, counterparties may provide in their risk management procedures the following in connection with OTC derivatives contracts that are concluded by a securitisation special purpose entity in connection with a securitisation as defined in regulation 3(1) of the Securitisation Regulations 2024 (SI 2024/102)1 and meeting the conditions of Article 4(5) of Regulation (EU) No 648/2012, as amended by the Securitisation (Amendment) Regulations 2024 (SI 2024/705)1:

1. (a)

   that variation margin is not posted by the securitisation special purpose entity but is collected from its counterparty in cash and returned to its counterparty when due;

2. (b)

   that initial margin is not posted or collected.

Paragraph 1 shall apply where all of the following conditions are met:

1. (a)

   the counterparty to the OTC derivative concluded with the securitisation special purpose entity in connection with the securitisation ranks at least pari passu with the holders of the most senior securitisation note, provided that counterparty is neither the defaulting nor the affected party;

2. (b)

   the securitisation special purpose entity for the securitisation to which the OTC derivatives contract is associated is subject to a level of credit enhancement of the most senior securitisation note of at least 2 % of the outstanding notes on an ongoing basis;

3. (c)

   the netting set does not include OTC derivative contracts unrelated to the securitisation.

By way of derogation from Article 2(2), counterparties established in the United Kingdom may provide in their risk management procedures that variation and initial margins are not required to be posted for non-centrally cleared OTC derivative contracts concluded with counterparties established in a third country for which any of the following apply:

1. (a)

   the legal review referred to in Article 2(3) confirms that the netting agreement and, where used, the exchange of collateral agreement cannot be legally enforced with certainty at all times;

2. (b)

   the legal review referred to in Article 19(6) confirms that the segregation requirements referred to in Article 19(3), (4) and (5) cannot be met.

For the purposes of the first subparagraph, counterparties established in the United Kingdom shall collect margin on a gross basis.

By way of derogation from Article 2(2), counterparties established in the United Kingdom may provide in their risk management procedures that variation and initial margins are not required to be posted or collected for contracts concluded with counterparties established in a third country where all of the following conditions apply:

1. (a)

   points (a) and, where applicable, point (b) of paragraph 1 apply;

2. (b)

   the legal reviews referred to in points (a) and (b) of paragraph 1 confirm that collecting collateral in accordance with this Regulation is not possible, even on a gross basis;

3. (c)

   the ratio calculated in accordance with paragraph 3 is lower than 2,5 %.

The ratio referred to in paragraph 2(c) shall be the result of dividing the amount resulting from point (a) of this paragraph with that resulting from point (b):

1. (a)

   the sum of the notional amounts of any outstanding OTC derivative contracts of the group to which the counterparty belongs that were concluded after the entry into force of this Regulation and for which no margin has been collected from counterparties established in a third country for which point (b) of paragraph 2 applies;

2. (b)

   the sum of the notional amounts of all outstanding OTC derivative contracts of the group to which the counterparty belongs, excluding OTC derivative contracts that are intragroup transactions.