Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof38. Capital Adequacy, Leverage and TLACCapital Adequacy, Leverage and TLAC - Directives and interpretations for completion of monthly return concerning capital adequacy, leverage and TLAC (Form BA 700)Subregulation (15) Matters related to leverage |
(15) Matters related to leverage
| (a) | In order to— |
| (i) | prevent the build-up of excessive on-balance-sheet and off-balance-sheet leverage in banks and banking groups; and |
| (ii) | mitigate the risks associated with deleveraging that may occur during a period of market uncertainty, such as the amplification of downward pressure on asset prices, material declines in bank capital, and contraction in the availability of credit that may cause damage to the broader financial system and the economy, |
every bank and every controlling company shall calculate a leverage ratio in accordance with the relevant requirements specified in this subregulation (15), to supplement the bank or controlling company’s relevant risk-based capital requirements.
| (b) | For purposes of this subregulation (15) a bank shall calculate its leverage ratio in accordance with the formula specified in paragraph (c) below, provided that— |
| (i) | the bank shall calculate the relevant amount of qualifying capital and reserve funds in accordance with the requirements specified in paragraph (d) below; |
| (ii) | the bank shall calculate the relevant exposure measure in accordance with the requirements specified in paragraph (e) below; |
| (iii) | in all relevant cases, the requirements specified in this subregulation (15) shall apply on a solo and a consolidated basis; |
| (iv) | a bank designated by the Authority as a domestic systemically important bank (D-SIB) shall manage its business in such a manner that its leverage ratio is at no stage less than 4 per cent, that is, the bank’s leverage multiple, which is the inverse of the bank’s leverage ratio, shall at no time exceed 25, or such leverage ratio and multiple as may be determined by the Authority in consultation with the Governor of the Reserve Bank, which leverage ratio shall in no case be less than 3 per cent, provided that the Authority may direct a D-SIB to maintain an additional leverage ratio buffer requirement, calculated in such a manner and subject to such conditions as may be directed in writing by the Authority, which may include conditions related to capital distribution constraints when the bank does not meet its leverage ratio buffer requirement; |
[Regulation 38(15)(b)(iv) substituted by section 6(n) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (v) | a bank other than a D-SIB shall manage its business in such a manner that its leverage ratio is at no stage less than 4 per cent, that is, the bank’s leverage multiple, which is the inverse of the bank’s leverage ratio, shall at no stage exceed 25, or such leverage ratio and multiple as may be determined by the Authority in consultation with the Governor of the Reserve Bank, which leverage ratio shall in no case be less than 3 per cent, provided that the Authority may direct a bank other than a D-SIB to maintain an additional leverage ratio buffer requirement, calculated in such a manner and subject to such conditions as may be directed in writing by the Authority, which may include conditions related to capital distribution constraints when the bank does not meet its leverage ratio buffer requirement; |
[Regulation 38(15)(b)(v) substituted by section 6(o) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (c) | Formula for the calculation of a bank or controlling company's leverage ratio |
A bank shall calculate its required leverage ratio in accordance with the formula specified below:
| where: | qualifying capital and reserve funds means the amount calculated in accordance with the relevant requirements specified in paragraph (d) below; and |
exposure measure means the amount calculated in accordance with the relevant requirements specified in paragraph (e) below.
| (d) | Matters related to the calculation of qualifying capital and reserve funds |
For the calculation of a bank’s leverage ratio, qualifying capital and reserve funds means the sum of common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77, column 1, of the form BA 700 that relates to the most recent reporting period.
| (e) | Matters related to the calculation of the exposure measure |
For the calculation of a bank’s leverage ratio, unless specifically provided otherwise in this subregulation (15), the relevant amount to be included in the bank’s required exposure measure shall be the relevant gross amount determined in accordance with the relevant Financial Reporting Standards that apply from time to time, provided that—
| (i) | the bank shall ensure that it has in place sufficiently robust policies, processes and procedures to ensure that the bank adequately captures all relevant sources of leverage, including— |
| (A) | exposure arising from securities financing transactions where the bank’s exposure to the counterparty increases as the counterparty’s credit quality decreases or securities financing transactions in which the credit quality of the counterparty is positively correlated with the value of the securities received in the transaction, that is, the credit quality of the counterparty falls when the value of the securities falls; |
| (B) | all relevant transactions in derivative instruments and securities financing transactions (SFTs); |
| (C) | all relevant off-balance sheet transactions and exposures; and |
| (D) | all relevant collateral swap trades, |
Provided that when the Authority, in its sole discretion, is of the opinion that the bank does not adequately capture exposures in its leverage ratio exposure measure or the manner in which the bank captures its leverage ratio exposure measure may lead to a potentially destabilising deleveraging process, the Authority may, among others—
| (i) | direct the bank to enhance its management of leverage; |
| (ii) | impose additional reporting requirements on the bank; |
| (iii) | impose additional capital requirements on the bank; and/ or |
| (iv) | impose a stricter leverage ratio requirement on the bank. |
| (ii) | the bank shall not, unless specially provided otherwise— |
| (A) | reduce its relevant leverage ratio exposure amount to account for any— |
| (i) | physical or financial collateral received; |
| (ii) | guarantee received; or |
| (iii) | any other relevant instrument obtained to mitigate credit risk; |
| (B) | net assets against liabilities or vice versa; or |
| (C) | deduct from its leverage ratio exposure measure any relevant liability item. |
For example, the bank shall not deduct from its leverage ratio exposure measure any gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to a change in the bank’s own credit risk.
| (iii) | the bank may reduce its leverage ratio exposure measure with the relevant amount related to any item deducted from the bank’s Tier 1 capital and reserve funds in terms of the relevant requirements specified in these Regulations, including, for example, regulation 38(5), or any relevant regulatory adjustment other than those related to a liability item. |
For example—
| (A) | when the bank, in accordance with the corresponding deduction approach envisaged in regulation 36, totally or partially deducts from its Common Equity Tier 1 (CET1) capital and reserve funds or Additional Tier 1 capital and reserve funds the amount of an investment held by the bank in the capital of any other bank, financial or insurance entity that falls outside the scope of regulatory consolidation, the bank may also deduct that amount from the bank’s leverage ratio exposure measure; |
| (B) | when the bank adopted the internal ratings-based (IRB) approach for the measurement of the bank’s exposure to credit risk, and the bank deducts from its CET1 capital and reserve funds the shortfall in eligible provisions relative to expected loss in accordance with the relevant requirements specified in regulation 23(22) read with regulation 38(5), the bank may also deduct that amount from the bank’s leverage ratio exposure measure; |
| (C) | when the bank deducts from its Tier 1 capital and reserve funds an amount related to a prudent valuation adjustment (PVA) for exposures to less liquid positions, other than those related to a liability item, the bank may also deduct that amount from the bank’s leverage ratio exposure measure. |
| (iv) | in the case of exposures arising from a traditional securitisation scheme, a bank that acts as an originator may exclude from its leverage ratio exposure measure any relevant securitisation exposure that meets the relevant operational requirements related to an effective transfer of risk, envisaged in the exemption notice relating to securitisation schemes, provided that the bank shall include in its leverage ratio exposure measure— |
| (A) | any relevant securitisation exposure retained; |
| (B) | all relevant securitised exposures arising from a traditional securitisation scheme that do not meet the relevant operational requirements related to risk transfer envisaged in the exemption notice relating to securitisation schemes; and |
| (C) | all relevant exposures arising from a synthetic securitisation scheme; |
| (v) | without derogating from the aforesaid, a bank’s aggregate leverage ratio exposure measure shall be equal to the sum of the bank’s— |
| (A) | on-balance sheet exposures, excluding specified exposures arising from derivative instruments and securities financing transactions |
A bank shall include in this category of on-balance sheet exposures all relevant amounts related to its balance sheet assets or items, including any relevant amount related to on-balance sheet derivatives collateral and collateral related to securities financing transactions (SFT), provided that—
| (i) | the bank shall exclude from this category of on-balance sheet exposures all relevant amounts related to on-balance sheet exposures arising from derivative instruments and SFT assets respectively envisaged in items (B) and (C) below; |
| (ii) | in the case of on-balance-sheet non-derivative assets, the bank shall include in its leverage ratio exposure measure the relevant amount determined in accordance with the respective Financial Reporting Standards that apply from time to time less any relevant deductions related to any associated specific impairments or provisions raised, provided that, as stated hereinbefore, any general provision or general loan loss reserve that has been deducted from the bank’s Tier 1 capital and reserve funds may also be deducted from the bank’s leverage ratio exposure measure; |
| (iii) | in the case of regular-way purchases or sales of financial assets, that is, purchases or sales of financial assets under contracts for which the contractual terms require delivery of the assets within the time frame generally established by regulation or convention in the market concerned, that have not been settled, which shall for purposes of these Regulations be referred to as “unsettled trades”, the bank shall for purposes of its leverage ratio exposure measure, reverse out any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets that may have been recognised under the applicable accounting framework when the bank, for example, adopted and applies trade-date accounting. Notwithstanding the aforegoing, the bank may offset between the relevant cash receivables and cash payables, irrespective of whether such offsetting is allowed in terms of the relevant accounting framework that applies from time to time, if the conditions specified below are met: |
| (aa) | the financial assets bought and sold that are associated with cash payables and receivables are fair valued through income and included in the bank’s trading book and treated in accordance with the relevant requirements specified in the relevant Prudential Standard issued from time to time for the measurement of a bank’s exposure to market risk; and |
| (bb) | the relevant transactions related to the financial assets are settled on a delivery-versus-payment (DVP) basis, |
Provided that when the bank applies settlement date accounting, the bank shall comply with the requirements specified in sub-item (iv) below;
| (iv) | when the bank applies settlement date accounting in relation to its regular-way purchases or sales of financial assets, the bank may offset commitments to pay for unsettled purchases and cash to be received for unsettled sales provided that the bank complies with the requirements specified below: |
| (aa) | the financial assets bought and sold, associated with cash payables and receivables, are fair valued through income and included in the bank’s trading book and treated in accordance with the relevant requirements set out in the relevant Prudential Standard issued from time to time for the measurement of a bank’s exposure to market risk; and |
| (bb) | the transactions of the financial assets are settled on a DVP basis; |
| (v) | in relation to the bank’s cash-management schemes, the bank may include in its leverage ratio exposure amount only the relevant final net amount or single account balance, and not the individual participating customer accounts, if the bank complies with all the relevant requirements specified in regulation 16, provided that when the bank does not comply with the requirements specified in regulation 16, the bank shall include in its leverage ratio exposure measure the respective individual gross balances of the participating customer accounts; |
| (vi) | when a banking, financial, insurance or commercial entity falls outside the scope of regulatory consolidation, the bank shall include in its exposure measure only the relevant amount related to the investment in the capital of such entities, that is, only the relevant carrying value or amount of the investment, instead of the underlying assets and/or other exposures, provided that any investment in the capital of such entities that is required to be deducted from the bank’s tier 1 capital and reserve funds in terms of the provisions of these Regulations may be excluded from the bank’s leverage ratio exposure measure, as envisaged in subparagraph (iii) hereinbefore; |
plus
| (B) | derivative exposures |
A bank shall include in this category of derivative exposures the relevant replacement cost as well as the relevant potential future exposure amount arising from all derivative exposures, including when the bank sells protection by means of a credit derivative instrument, in accordance with the requirements specified in this item (B), provided that—
| (i) | as a general rule, unless specifically provided otherwise— |
| (aa) | the bank shall not net collateral received against its derivative exposures, irrespective of whether netting may be permitted in terms of the bank’s operative accounting framework or risk-based framework, that is, when the bank calculates its relevant leverage ratio derivative exposure amount, the bank— |
| (i) | shall not reduce the leverage ratio exposure measure by any collateral received from the counterparty; |
| (ii) | shall not reduce the relevant replacement cost related to a derivative exposure with any collateral received; |
| (iii) | shall not reduce the multiplier, which is fixed at one, when calculating the relevant required potential future exposure specified in sub-item (vii), as a result of collateral received; |
| (bb) | the bank may recognise the PFE-reducing effect from the regular exchange of variation margin in relation to the maturity factor in the PFE add-on calculation, as envisaged in sub-item (vii); |
| (cc) | the bank shall gross up its leverage ratio exposure measure by the amount of any relevant derivatives collateral provided when the bank reduced the value of its balance sheet assets in terms of the bank’s operative accounting framework as a result of such collateral provided; |
| (dd) | netting across product categories, such as, for example, derivative instruments and SFTs, shall not be permitted when the bank calculates its leverage ratio exposure measure, provided that, when the bank has in place a cross-product netting agreement that complies with the eligibility criteria specified in, the bank may choose to perform netting separately in each relevant product category when all other relevant requirements envisaged in this item (B) for netting are met; |
| (ee) | when the bank sells protection using a credit derivative instrument, the bank shall calculate its relevant leverage ratio exposure measure as 1.4 times the sum of the relevant instrument’s replacement cost and the relevant potential future exposure, as set out further in sub-item (ii) below; |
| (ii) | in the case of derivative instruments or transactions not covered by an eligible bilateral netting agreement complying with the respective requirements specified in regulation 23(18)(b), the amount to be included in the bank’s leverage ratio exposure measure shall be determined for each relevant instrument or transaction separately, in accordance with the formula specified below: |
Leverage ratio exposure measure = alpha * (RC + PFE)
where:
| alpha | is a scalar or multiplier, equal to 1.4 |
| RC | is the relevant required replacement cost calculated in accordance with the formula and the requirements specified in sub-items (iv) and (v) below |
| PFE | is the relevant required potential future exposure amount calculated in accordance with the formula and requirements specified in sub-item (vi) below |
| (iii) | when the bank’s exposure arising from a derivative instrument or transaction is covered by an eligible bilateral netting contract that complies with the requirements specified in regulation 23(18)(b), the bank shall apply the formula specified in sub-item (ii) hereinbefore at the relevant netting set level; |
| (iv) | unless specifically provided otherwise, the bank shall calculate the relevant required replacement cost of an instrument, transaction or netting set in accordance with the formula specified below: |
where:
| V | is the market value of the relevant individual derivative instrument or transaction or of the derivative transactions in a netting set |
| CVMr | is the relevant cash variation margin received that complies with the respective requirements specified in sub-item (v) below, provided that— |
| (aa) | the amount has not already reduced the market value of the derivative instrument or transaction, that is, V, in terms of the bank’s relevant operative accounting framework or standard; |
| (bb) | when the conditions in sub-item (v) below are met, the cash portion of variation margin received may be used to reduce the relevant replacement cost portion of the bank’s leverage ratio exposure measure, and the receivable assets from cash variation margin provided may be deducted from the bank’s leverage ratio exposure measure as follows: |
In the case of cash variation margin—
| (i) | received, the bank receiving the cash variation margin may reduce the replacement cost, but not the PFE component, of the exposure amount of the relevant derivative asset; |
| (ii) | provided to a counterparty, the bank posting the cash variation margin may deduct the resulting receivable from its leverage ratio exposure measure where the cash variation margin has been recognised as an asset in terms of the bank’s relevant operative accounting framework, and instead include the cash variation margin provided in the calculation of the relevant derivative replacement cost |
| CVMp | is the relevant amount of cash variation margin paid or provided by the bank, and that complies with the respective requirements specified in sub-item (v) below |
| (v) | the bank may regard the cash portion of variation margin exchanged between the bank and its counterparty as a form of pre-settlement payment when the conditions specified below are met: |
| (aa) | In the case of trades not cleared through a qualifying central counterparty (QCCP), the cash received by the recipient counterparty shall not be required to be segregated, and the recipient counterparty is not subject to any restriction by law, regulation, or any agreement with the counterparty to use the cash received at own discretion, that is, the cash variation margin received shall in all respects be equivalent to own cash; |
| (bb) | Variation margin shall be calculated and exchanged between the bank and its counterparty on at least a daily basis, based upon the mark-to-market valuation of the relevant derivative positions, that is, all relevant derivative positions shall be marked-to-market daily and cash variation margin shall be transferred daily to the counterparty or to the counterparty’s account, as the case may be, provided that, in this regard, cash variation margin exchanged the morning of the trading day immediately following the day in respect of which the end-of-day market valuation were done in relation to the relevant instruments or transactions, shall be deemed to comply with the requirement specified hereinbefore; |
| (cc) | The variation margin shall be received in a currency specified in the relevant derivative contract, governing master netting agreement (MNA), credit support annex (CSA) to the qualifying MNA or as defined in terms of the relevant netting agreement with a CCP; |
| (dd) | The variation margin exchanged shall be the relevant full amount necessary to extinguish the mark-to-market exposure arising from the derivative contract, subject to the threshold and minimum transfer amounts applicable to the relevant counterparty; |
| (ee) | The relevant derivative transactions and variation margins shall be covered by a single MNA, including any legally enforceable netting agreement that provides legally enforceable rights for set-off, between the legal entities that are the respective counterparties to the relevant derivative transaction, which MNA— |
| (i) | shall explicitly state that the counterparties agree to settle the relevant payment obligations covered by that netting agreement on a net basis, taking into account any variation margin received or provided if a credit event occurs involving either counterparty; |
| (ii) | shall be legally enforceable and effective in all relevant jurisdictions, as envisaged in regulation 23(18)(b), including in the event of default, bankruptcy or insolvency; |
| (vi) | unless specifically provided otherwise, the bank shall calculate the relevant required potential future exposure amount, denoted by PFE, for all relevant derivative instruments or exposures in accordance with the formula specified below: |
PFE = multiplier * AddOnaggregate
Provided that—
| (aa) | for purposes of the leverage ratio exposure measure, the multiplier for the calculation of the PFE is fixed, at one; |
| (bb) | when the bank calculates the relevant required add-on component, the bank may use the maturity factor specified in regulation 23(18)(a)(iii)(A)(xiv) for all relevant margined transactions; |
| (cc) | since written options create an exposure to the relevant underlying, the bank shall include such written options in the calculation of its leverage ratio exposure measure in accordance with the relevant requirements specified in this subregulation (15), even when such written option may be assigned an amount equal to zero in relation to the relevant exposure at default (EAD) for purposes of calculating the bank’s minimum required amount of capital and reserve funds. |
| (vii) | when the bank acts as a clearing member (CM) and offers clearing services to clients, the bank’s trade exposures to the central counterparty (CCP) that arise when the bank is obligated to reimburse a client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults shall be included in the bank’s leverage ratio exposure measure by applying the same treatment that applies to any other type of derivative transaction, provided that— |
| (aa) | when a client enters directly into a derivative transaction with the CCP and the bank acting as a clearing member guarantees the performance of its client’s derivative trade exposures to the CCP, the bank acting as the CM for the client to the CCP shall calculate and include in its related leverage ratio exposure measure the exposure arising from the guarantee as a derivative exposure, as if it had entered directly into the transaction with the client, including with regard to the receipt or provision of cash variation margin; |
| (bb) | an entity affiliated to the bank acting as a CM may be considered a client if it falls outside the relevant scope of regulatory consolidation at the level at which the relevant leverage ratio is applied, provided that when an affiliate entity falls within the regulatory scope of consolidation, the trade between the affiliate entity and the bank acting as a CM will be eliminated in the course of consolidation but the CM will still have a trade exposure to the CCP, which transaction with the CCP must be included in the CM’s leverage ratio exposure measure; |
| (cc) | when, based on a legally enforceable contractual arrangement with the client, the bank acting as a clearing member is not obligated to reimburse the client for any losses suffered in the event that a QCCP defaults, the bank acting as a clearing member is not required to include the resulting trade exposures to the QCCP in its leverage ratio exposure measure; |
| (dd) | when the bank provides clearing services as a “higher level client” within a multi-level client structure, the bank is not required to include in its leverage ratio exposure measure the resulting trade exposures to the CM or to an entity that serves as a higher-level client to the bank, if all the requirements specified below are met: |
| (i) | The offsetting transactions shall be identified by the QCCP as higher-level client transactions and collateral to support them shall be held by the QCCP and/or the CM, as the case may be, under arrangements that prevent any losses to the higher-level client due to the default or insolvency of the CM; the default or insolvency of the CM’s other clients; and the joint default or insolvency of the CM and any of its other clients, |
That is, upon the insolvency of the clearing member, there shall be no legal impediment, other than the need to obtain a court order to which the client is entitled, to the transfer of the collateral belonging to clients of a defaulting clearing member to the QCCP, to one of more other surviving clearing members or to the client or the client’s nominee;
| (ii) | The bank shall conduct sufficiently robust and sufficiently frequent legal reviews to ensure the bank has a well-founded legally enforceable basis to conclude that, in the event of legal challenge, the relevant courts and administrative authorities would find that the relevant agreements are legal, valid, binding and enforceable under all relevant laws in/of the relevant jurisdiction(s); |
| (iii) | Relevant laws, regulation, rules, contractual or administrative arrangements shall provide that the offsetting transactions with the defaulted or insolvent CM are highly likely to continue to be indirectly transacted through the QCCP, or by the QCCP, if the CM defaults or becomes insolvent, in which circumstances the higher-level client positions and collateral with the QCCP will be transferred at market value unless the higher-level client requests to close out the relevant position at market value; and |
| (iv) | The bank shall not be obligated to reimburse its client for any losses suffered in the event of default of either the CM or the QCCP; |
| (viii) | in the case of a written credit derivative instrument, that written credit derivative instrument creates a notional credit exposure amount related to the creditworthiness of the relevant reference entity, in addition to the CCR exposure arising from the fair value of the relevant contracts— |
| (aa) | which written credit derivative instrument includes all forms of instruments, including options, by means of which the bank effectively provides credit protection to a person, and is not limited to instruments such as, for example, credit default swaps or total return swaps; |
| (bb) | which exposure amount shall for purposes of the calculation of the bank’s leverage ratio exposure measure be treated in a manner consistent with cash instruments, such as, for example, loans or bonds; |
| (cc) | of which the effective notional amount shall be included in the bank’s relevant leverage ratio exposure measure, unless the written credit derivative is included in a transaction cleared on behalf of a client of the bank acting as a CM or acting as a clearing services provider in a multi-level client structure, and the transaction meets the relevant requirements specified hereinbefore for the exclusion of the relevant trade exposures to the QCCP or, in the case of a multi-level client structure, the relevant requirements for the exclusion of trade exposures to the CM or the QCCP; |
| (dd) | which effective notional amount shall in all relevant cases be obtained by adjusting the relevant notional amount to reflect the true exposure of contracts that are or may be leveraged or otherwise enhanced by the structure of the relevant transaction; |
| (ee) | which effective notional amount may be reduced by any relevant negative change in the fair value amount that has been incorporated into the calculation of the bank’s Tier 1 capital and reserve funds with respect to the written credit derivative instrument, that is, when a written credit derivative instrument, for example, had a positive fair value of 20 on one reporting date and a negative fair value of 10 on a subsequent reporting date, the effective notional amount of the credit derivative may be reduced by 10, but not by 30, provided that when the credit derivative instrument has a positive fair value of five on the subsequent reporting date, the effective notional amount shall not be reduced at all; |
| (ff) | which effective notional amount may be reduced by the effective notional amount of a credit derivative instrument purchased in respect of the same reference entity or name, provided that— |
| (i) | the credit protection purchased through the credit derivative instrument shall be subject to the same or more conservative material terms, such as, for example, the level of subordination, optionality, credit events, reference or other characteristics relevant to the valuation of the relevant derivative instrument, as those in the corresponding written credit derivative instrument; |
| (ii) | the remaining maturity of the credit protection purchased through the credit derivative instrument shall be equal to or greater than the remaining maturity of the written credit derivative instrument; |
| (iii) | the credit protection purchased through the relevant credit derivative instrument shall not be purchased from a counterparty of which the credit quality is highly correlated with the value of the relevant reference obligation; |
| (iv) | when the effective notional amount of the written credit derivative instrument is reduced by any negative change in the fair value reflected in the bank’s Tier 1 capital and reserve funds, the effective notional amount of the offsetting credit protection purchased through a credit derivative instrument shall also be reduced by any resulting positive change in fair value reflected in the bank’s Tier 1 capital and reserve funds; |
| (v) | the credit protection purchased through the credit derivative instrument has not been included in a transaction cleared on behalf of a client or cleared by the bank in its role as a clearing services provider in a multi-level client services structure, as envisaged hereinbefore, and for which the effective notional amount referenced by the corresponding written credit derivative is excluded from the leverage ratio exposure measure; |
| (vi) | two reference names shall be considered to be identical only when they refer to the same legal entity; |
| (vii) | credit protection purchased on a pool of reference names through a credit derivative instrument may offset credit protection sold on individual reference names only when the bank is able to demonstrate to the satisfaction of the Authority that the credit protection purchased is economically and in all material respects equivalent to purchasing credit protection separately on each of the relevant individual names in the pool, that is, when the bank, for example, purchases credit protection on a pool of reference names through a credit derivative instrument, but the credit protection purchased does not cover the entire pool but covers only a subset of the pool, such as in the case of an nth-to-default credit derivative instrument or a securitisation tranche, the bank may not offset the relevant amount against the relevant written credit derivative instrument on the individual reference names; |
| (viii) | purchased credit protection may offset written credit derivatives on a pool of exposures only when the credit protection purchased through the relevant credit derivatives covers the entirety of the subset of the pool on which the credit protection has been sold; |
| (ix) | when the bank purchases credit protection through a total return swap (TRS) and records the net payments received as net income, but does not record offsetting deterioration in the value of the written credit derivative, either through a reduction in the fair value or by an addition to reserves in the bank’s Tier 1 capital and reserve funds, the bank shall not offset that credit protection against the effective notional amounts related to the written credit derivative instruments; |
| (x) | when the bank calculates its relevant potential future exposure amount, the bank may exclude from the netting set for the calculation of the PFE the portion of a written credit derivative instrument in respect of which no offsetting is permitted in terms of the provisions of this subregulation 15, because the relevant specified requirements for offsetting are not met, and in respect of which the effective notional amount is included in the bank’s leverage ratio exposure measure, if the bank is able to demonstrate to the satisfaction of the Authority that the inclusion of the written credit derivative instrument in the bank’s leverage ratio exposure measure at its effective notional amount, and in the required calculation for PFE, will result in an unduly overstatement of the bank’s actual leverage ratio exposure measure in relation to written credit derivative instruments; |
plus
| (C) | exposures arising from securities financing transactions (SFT) |
A bank shall include in its exposure measure any relevant exposure arising from its securities financing transactions, provided that—
| (i) | for purposes of this subregulation (15) securities financing transactions include transactions such as repurchase agreements, resale agreements, reverse repurchase agreements, securities lending transactions, securities borrowing transactions, and margin lending transactions, where the value of the respective transactions depends on market valuations and the transactions are often subject to margin agreements; |
| (ii) | in the case of a bank— |
| (aa) | that acts as principal, the bank shall include in its exposure measure the sum of the respective amounts envisaged in subitems (iv) and (v) below; |
| (bb) | that acts as an agent, the bank shall include in its exposure measure the sum of the respective amounts envisaged in subitem (vii) below; |
| (iii) | since leverage essentially remains with the lender of the security in a securities financing transaction, the bank shall reverse any sales-related accounting entry whenever the bank applied sale accounting entries in terms of any relevant accounting framework in respect of its securities financing transactions, that is, irrespective of the bank’s accounting framework the bank shall calculate its exposure measure as if its securities financing transactions constitute financing transactions and not sales transactions; |
| (iv) | a bank that acts as principal shall include in its exposure measure the relevant gross amount of assets that relates to securities financing transactions, recognised as assets in accordance with the relevant Financial Reporting Standards issued from time to time, provided that— |
| (aa) | for purposes of this subregulation (15), unless specifically stated otherwise, the bank shall disregard any form of accounting netting, that is, unless specifically stated otherwise in this subregulation (15)(e), the bank shall not, for example, recognise any accounting netting of cash payables against cash receivables; |
| (bb) | in the case of any assets related to securities financing transactions subject to novation and cleared through a QCCP, the bank shall include in its exposure measure the relevant final contractual exposure, that is, the relevant exposure to the QCCP after the process of novation has been applied, since the pre-existing contracts have been replaced by new legal obligations through the process of novation; |
| (cc) | the bank shall only net cash receivables and cash payables with the relevant QCCP if the criteria specified in this sub-item (iv) are met, that is, any form of netting permitted by the QCCP other than the amounts envisaged in and that comply with the relevant criteria specified in this sub-item (iv) shall not be netted when the bank calculates its relevant required leverage ratio exposure measure; |
| (dd) | the bank shall adjust the aforesaid gross amount of assets by excluding from the exposure measure the value of any securities received in terms of a securities financing transaction, when the bank has recognised the securities as assets on its balance sheet, that is, when the bank recognised securities received in terms of a securities financing transaction as assets because the bank, as recipient, has the right to rehypothecate the said securities, but the bank has not done so, and in terms of any relevant accounting standard that may apply, the bank recognised the value of such securities received in terms of the securities financing transaction as assets, the bank shall adjust the aforesaid gross amount of assets by excluding from the exposure measure the value of such securities received; |
| (ee) | notwithstanding the provisions of sub-sub-item (aa) hereinbefore, the bank may measure cash payables and cash receivables in terms of securities financing transactions with the same counterparty on a net basis if all the conditions specified below are met: |
| (i) | the relevant transactions have the same explicit final settlement date, provided that transactions with no explicit maturity or end date and which can be unwound at any time by either party to the transaction shall not be netted for purposes of calculating the bank’s required leverage ratio exposure measure; |
| (ii) | the bank’s right to set off the amount owed to the counterparty against the amount owed by the counterparty shall be legally enforceable in all relevant jurisdictions, both currently in the normal course of business and in the event of the counterparty’s default, insolvency or bankruptcy; and |
| (iii) | the bank and the relevant counterparty intend to settle net, and to settle simultaneously, or the relevant transactions must be subject to a settlement mechanism that results in the functional equivalent of net settlement, that is, the cash flows of the relevant transactions are essentially a single net amount on the settlement date, provided that, to ensure the aforesaid equivalence to a single net amount, both transactions shall be settled through the same settlement system and the settlement arrangements shall be supported by cash and/or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and any challenges or difficulty that may arise from the relevant securities legs of the relevant securities financing transactions shall not have an impact on the required completion of the relevant net settlement of the cash receivables and payables, that is, the failure of any single securities transaction in the settlement mechanism may delay settlement of only the matching cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility, provided that when there is a failure of the securities leg of the relevant transaction at the end of the window for settlement in the settlement mechanism, that transaction and its matching cash leg shall be split out from the netting set and shall be treated on a gross basis; |
| (v) | a bank that acts as principal shall include in its exposure measure a specified measure of counterparty credit risk, calculated as the current exposure without an add-on for potential future exposure, as specified below, provided that, for purposes of this subitem (v), the term counterparty includes not only the counterparty to the relevant bilateral repo transaction but also any relevant triparty repo agent that receives collateral in deposit and manages the collateral in the case of triparty repo transactions, that is, securities deposited at triparty repo agents shall be included in the bank’s relevant total value of securities and cash lent to a counterparty, denoted by E, up to the amount effectively lent to the counterparty in the relevant repo transaction, provided that in such cases, any excess collateral deposited at triparty agents but that has not been lent out may be excluded from the relevant calculation: |
| (aa) | when the bank has in place a qualifying master netting agreement that complies with all the relevant requirements specified in subitem (vi) below, the said current exposure amount, denoted by E*, shall be equal to the greater of zero and the total fair value of securities and cash lent to a counterparty in respect of all relevant transactions covered by the said qualifying master netting agreement, denoted by ΣEi, less the total fair value amount of cash and securities received from that counterparty for those transactions, denoted by ΣCi, as depicted in the formula specified below: |
E* = max {0, [ΣEi – ΣCi]}
where:
| E* | is the relevant current exposure amount |
| ΣEi | is the total fair value of securities and cash lent to a counterparty for all relevant transactions included in the said qualifying master netting agreement |
| ΣCi | is the total fair value of cash and securities received from that counterparty for the aforesaid transactions |
| (aa) | when the bank does not have a qualifying master netting agreement in place, the said current exposure amount related to transactions with the relevant counterparty shall be calculated on a transaction-by-transaction basis, that is, each relevant transaction shall be treated as its own netting set, as depicted in the formula specified below: |
Ei* = max {0, [Ei – Ci]}
where:
| Ei* | is the relevant current exposure amount related to the specific transaction with the counterparty, provided that the bank may in relevant cases set Ei* equal to zero if— |
| (iv) | Ei is the cash lent to a counterparty; |
| (v) | the relevant transaction is treated as its own netting set; and |
| (vi) | the associated cash receivable is not eligible for netting in accordance with the relevant requirements specified in subitem (iv) hereinbefore. |
| (vi) | a bank that acts as principal may recognise the effect of a bilateral master netting agreements in respect of its securities financing transactions on a counterparty-by-counterparty basis, as envisaged in and in accordance with the relevant requirements specified in subitem (v) above, provided that— |
| (aa) | the relevant bilateral master netting agreement— |
| (i) | shall be legally enforceable in each relevant jurisdiction upon the occurrence of an event of default, regardless of whether the counterparty is insolvent or bankrupt; |
| (ii) | shall provide the non-defaulting party with the right to terminate and close out in a timely manner all relevant transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty; |
| (iii) | shall make provision for the netting of gains and losses on transactions, including the value of any relevant collateral, terminated and closed out in terms of the bilateral master netting agreements, so that a single net amount is owed by one party to the other; |
| (iv) | shall make provision for the prompt liquidation or setoff of collateral upon the event of default; and |
| (v) | all relevant rights envisaged in this sub-subitem (aa) shall be legally enforceable in each relevant jurisdiction upon the occurrence of an event of default, regardless of the counterparty’s insolvency or bankruptcy; |
| (bb) | the bank may apply netting across positions held in the bank’s banking book and its trading book only when— |
| (i) | all the relevant transactions are marked to market on a daily basis; and |
| (ii) | all the collateral instruments used in respect of the relevant transactions are recognised as eligible financial collateral in the banking book; |
| (vii) | since a bank that acts as agent in a securities financing transaction— |
| (aa) | generally provides only an indemnity or guarantee to one of the two persons involved in the transaction, and only for the difference between the value of the security or cash its customer has lent and the value of collateral the borrower has provided; and |
| (bb) | the bank is essentially exposed to the counterparty of its customer for only the difference in values instead of the full exposure to the underlying security or cash of the transaction; and |
| (cc) | the bank normally does not own or control the underlying cash or security resource, and as such the bank is unable to leverage the resource, |
the bank shall include in its exposure measure only the amounts envisaged in subitem (v) above, provided that—
| (i) | when the bank is economically further exposed to the underlying security or cash in the transaction, that is, for an amount larger than the aforesaid guarantee for the difference, the bank shall include in its exposure measure the relevant further amount of exposure, equal to the relevant full amount of exposure to the underlying security or cash in the transaction; |
| (ii) | when the bank provides an indemnity or guarantee to both parties involved in the securities financing transaction, that is, the securities lender as well as the securities borrower, the bank shall calculate the relevant amounts related to its leverage ratio exposure measure in accordance with the respective requirements specified in this subitem (vii) separately for each of the relevant counterparties involved in the transaction. |
plus
| (D) | off-balance sheet items |
A bank shall include in its leverage ratio exposure measure all relevant off-balance sheet items or exposures, provided that for purposes of this subregulation (15)—
| (i) | off-balance sheet items or exposures include— |
| (aa) | commitments, including liquidity facilities, whether or not unconditionally cancellable; |
| (bb) | all relevant direct credit substitutes; |
| (cc) | acceptances; |
| (dd) | standby letters of credit; and |
| (ee) | trade letters of credit; |
| (ii) | commitment includes any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes, including— |
| (aa) | any such arrangement that may be unconditionally cancelled by the bank at any time without prior notice to the obligor; |
| (bb) | any such arrangement that can be cancelled by the bank if the obligor fails to meet conditions set out in the facility documentation, including conditions that must be met by the obligor prior to any initial or subsequent drawdown arrangement; |
| (iii) | the bank shall convert the relevant committed amount as well as any unconditionally cancellable but undrawn amount related to its off-balance sheet items into credit exposure equivalents by multiplying the envisaged amounts specified in table 1 below with the relevant credit conversion factors specified in table 1 below: |
Table 1 |
|||||||||||||||||
Description of off-balance sheet item |
Credit conversion factor |
||||||||||||||||
Direct credit substitutes, such as, for example, general guarantees of indebtedness; standby letters of credit serving as financial guarantees for loans and securities; acceptances and endorsements with the character of acceptances |
100% |
||||||||||||||||
Forward asset purchases, forward forward deposits and partly paid shares and securities, which represent commitments with certain drawdown |
100% |
||||||||||||||||
An exposure associated with unsettled financial asset purchases, that is, the commitment to pay, where regular-way unsettled trades are accounted for at settlement date, provided that the bank may offset commitments to pay for unsettled purchases and cash to be received for unsettled sales when the following conditions are met:
|
100% |
||||||||||||||||
Drawn self-liquidating trade letters of credit arising from the movement of goods, that is, documentary credits collateralised by the underlying shipment, with an original maturity of one year or more |
50% |
||||||||||||||||
Performance related guarantees |
50% |
||||||||||||||||
Transaction-related contingent items, such as, for example, performance bonds; bid bonds; warranties and standby letters of credit |
50% |
||||||||||||||||
Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs), regardless of the maturity of the underlying facility |
50% |
||||||||||||||||
Any irrevocable undrawn commitment not included in any other specified category assigned a lower or higher credit conversion factor |
40% |
||||||||||||||||
Short-term self-liquidating trade letters of credit with a maturity below one year arising from the movement of goods, such as, for example, documentary credits collateralised by the underlying shipment - applied to both issuing and confirming banks |
20% |
||||||||||||||||
An undertaking to provide a commitment on an off-balance sheet item |
Banks shall apply the lower of the two applicable CCFs |
||||||||||||||||
Off-balance sheet securitisation exposures, other than an eligible liquidity facility or an eligible servicer cash advance facility |
100% |
||||||||||||||||
Eligible liquidity facilities other than undrawn servicer cash advances or facilities that are unconditionally cancellable without prior notice |
50% |
||||||||||||||||
Commitments that are unconditionally cancellable at any time by the bank without prior notice or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness |
10% |
||||||||||||||||
Undrawn servicer cash advances or facilities that are unconditionally cancellable without prior notice |
10% |
||||||||||||||||
Such arrangements regarded by the Authority as not falling within the ambit of commitments as envisaged in these Regulations and that comply with specified requirements 1 |
0% |
||||||||||||||||
|
|||||||||||||||||
| (iv) | any relevant specific or general provision related to an off-balance sheet item or exposure that has reduced the bank’s relevant amount of Tier 1 capital and reserve funds may be deducted equally from the credit exposure equivalent amount related to those exposures, that is, the relevant exposure amount after the application of the relevant specified credit conversion factor, provided that the relevant resulting off-balance sheet equivalent amount for a particular off-balance sheet exposure shall in no case be less than zero. |
[Regulation 38(15)(e) substituted by section 6(p) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]