Market conditions that impact derivative values move every day, and the bank is both posting and receiving collateral through margin calls. Under stressed market conditions those moves can be much larger than the bank experiences day to day, and the bank has to hold liquidity against them. The adverse market conditions are captured in the LCR and do not impact the NSFR.

The credit support annex (CSA) can carry terms set against the external credit rating of the bank, and those terms are the downgrade triggers. They require the bank to post more collateral, or to pay cash, if the bank is downgraded. This is a contingent obligation, and the bank recognises the outflow in the LCR.

In derivative transactions the credit support annex (CSA) sets the terms of the collateral, and it can give the counterparty the right to substitute the collateral it has posted without the consent of the bank. The presence of such a right requires the bank to capture an outflow in the LCR. This notebook covers the net asset position, where the bank receives variation margin (VM) and the counterparty holds the substitution right over it.