SECTION 3 Exemptions from the requirement to post or collect initial or variation margin
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:
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;
initial margin is not posted or collected.
Paragraph 1 applies where all of the following conditions are met:
the OTC derivative contract is not terminated in case of resolution or insolvency of the covered bond issuer or cover pool;
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;
the OTC derivative contract is registered or recorded in the cover pool of the covered bond in accordance with national covered bond legislation;
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;
the netting set does not include OTC derivative contracts unrelated to the cover pool of the covered bond;
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;
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 %.