What is collateral?

In finance, the meaning of collateral is an asset that stands behind a promise to pay. For banking, Directive 2002/47/EC gives the definition: a "financial collateral arrangement" is a title transfer or a security arrangement between two parties, whether or not it sits under a master agreement (Article 2(1)(a)). Under the 2002 text, the collateral "must consist of cash or financial instruments" (Article 1(4)(a)). Directive 2009/44/EC of May 6, 2009 added credit claims, which the ECB had accepted for Eurosystem credit operations since January 1, 2007.

Outside that directive, national property law applies. For example, a house behind a mortgage loan or a car behind a car loan is collateral for a loan too. When the provider defaults, the directive lets the collateral taker sell financial instruments or appropriate them, and set cash off against the debt (Article 4(1)).

Collateral is the asset; a security interest and a pledge are legal ways of giving it. In English, "security" means both a tradable instrument and a right over an asset. A collateral security is an instrument given as collateral. Directive 2002/47/EC separates the two legal forms. In a security financial collateral arrangement, "the full ownership of the financial collateral remains with the collateral provider" (Article 2(1)(c)). In a title transfer, full ownership passes to the taker (Article 2(1)(b)).

A pledge is one type of security interest, in which the provider stays owner and the taker may sell on default. A collateral agreement is the contract that sets these terms, often a master agreement. It can give the taker a "right of use", which lets the taker use and dispose of the collateral as if it were the owner (Article 2(1)(m)).

A haircut is a percentage cut from the market value of collateral, so that a fall in price does not leave the taker short. Under the Basel Framework, a bank that holds shares from a main index as collateral counts only 80% of their value, a 20% haircut. Other listed shares take 30%, gold 20%, and cash in the same currency 0%. If collateral and loan are in different currencies, a further 8% applies (CRE22.49 and CRE22.52). In EU law, Article 224 CRR sets the matching "volatility adjustments".

A repo is a sale of securities with an agreement to buy them back, which in effect is a loan against collateral. Article 4(1)(83) CRR defines a repurchase transaction as a transaction under a repurchase or reverse repurchase agreement, and Directive 2002/47/EC counts repurchase agreements as title transfer arrangements.

Margin is collateral posted against the changing value of a derivative. Under EMIR, a central counterparty must "impose, call and collect margins" (Article 41(1)). For derivatives that are not cleared, counterparties must value open contracts daily and exchange collateral in a timely and segregated way (Article 11(2) and (3)). Collateral management is that daily cycle of valuing positions, calling margin and returning or replacing collateral.

Tokenized versions of eligible assets can count as collateral in central bank and bank capital rules; other crypto-assets cannot. The ECB explained the change to the Eurosystem collateral framework on January 27, 2026: from March 30, 2026, the Eurosystem accepts marketable assets issued in central securities depositories using DLT-based services. They must meet the usual eligibility criteria, including settlement in systems reachable via TARGET2-Securities (ECB, January 27, 2026). Further ECB work on DLT collateral looks at assets issued and settled entirely on DLT networks.

For banks, the Basel standard on cryptoassets allows only Group 1a cryptoassets that are "tokenised versions of the instruments included on the list of eligible financial collateral" (SCO60.30). Stablecoins in Group 1b are not eligible collateral in themselves (SCO60.39).

Directive 2002/47/EC applies in Germany and Austria through national law; member states had to transpose it by December 27, 2003 (Article 11). The CRR rules on credit risk mitigation apply directly. BaFin supervises banks in Germany with the Bundesbank, the FMA in Austria with the OeNB.

Banks in the euro area that borrow from the central bank post eligible collateral through one system. The Eurosystem Collateral Management System (ECMS) went live on June 16, 2025 and replaced the separate systems of the 20 euro area national central banks. The Deutsche Bundesbank, whose head office is in Frankfurt am Main, is one of the four central banks that built it (ECB, June 17, 2025; Bundesbank).

Switzerland is outside the EU, so neither the directive nor the CRR applies there. FINMA's Ordinance on the Credit Risks of Banks and Securities Firms (CreO-FINMA) covers the technical details of the standardized approach from January 1, 2025. FINMA decided not to introduce minimum haircuts for certain securities financing transactions as long as other major financial centers do not introduce them (FINMA, March 27, 2024). This page gives no legal advice.