Recital 52

(52)Annex III lays down the treatment of off-balance-sheet items in the context of the calculation of credit institutions' capital requirements. With a view to the smooth functioning of the internal market and in particular with a view to ensuring a level playing field Member States are obliged to strive for uniform assessment of contractual netting agreements by their competent authorities. Annex III takes account of the work of an international forum of banking supervisors on the supervisory recognition of bilateral netting, in particular the possibility of calculating the own-funds requirements for certain transactions on the basis of a net rather than a gross amount provided that there are legally binding agreements which ensure that the credit risk is confined to the net amount. For internationally active credit institutions and groups of credit institutions in a wide range of third countries, which compete with Community credit institutions, the rules adopted on the wider international level will result in a refined supervisory treatment of over-the-counter (OTC) derivative instruments. This refinement results in a more appropriate compulsory capital cover taking into account the risk-reducing effects of supervisorily recognised contractual netting agreements on potential future credit risks. The clearing of OTC derivative instruments provided by clearing houses acting as a central counterparty plays an important role in certain Member States. It is appropriate to recognise the benefits from such a clearing in terms of a reduction of credit risk and related systemic risk in the prudential treatment of credit risk. It is necessary for the current and potential future exposures arising from cleared OTC derivatives contracts to be fully collateralised and for the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral to be eliminated in order for cleared OTC derivatives to be granted for a transitional period the same prudential treatment as exchange-traded derivatives. The competent authorities must be satisfied as to the level of the initial margins and variation margins required and the quality of and the level of protection provided by the posted collateral. For credit institutions incorporated in the Member States, Annex III creates a similar possibility for the recognition of bilateral netting by the competent authorities and thereby offers them equal conditions of competition. The rules are both well balanced and appropriate for the further reinforcement of the application of prudential supervisory measures to credit institutions. The competent authorities in the Member States should ensure that the calculation of add-ons is based on effective rather than apparent national amounts.