| 6.1 | Banks must not use physical or financial collateral, guarantees or other credit risk mitigation techniques to reduce the Leverage ratio exposure measure, nor may banks net assets and liabilities, unless specified differently by SAMA.
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| 6.2 | Any item deducted from Tier 1 capital, according to the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments, other than those related to liabilities can be deducted from the Leverage ratio exposure measure. Three examples follow:
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| | (i) | Where a banking, financial or insurance entity is not included in the regulatory scope of consolidation as set out in paragraph 2.2, the amount of any investment in the capital of that entity that is totally or partially deducted from Common Equity Tier 1 (CET1) capital or from Additional Tier 1 capital of the bank follow the corresponding deduction approach in the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments, may also be deducted from the Leverage ratio exposure measure;
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| | (ii) | For banks using the internal ratings-based (IRB) approach to determining capital requirements for credit risk, the Excess of total eligible provisions under IRB section in the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments requires any shortfall in the stock of eligible provisions relating to expected loss amounts to be deducted from CET1 capital. The same amount may be deducted from the Leverage ratio exposure measure; and
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| | (iii) | Prudent valuation adjustments (PVAs) for exposures to less liquid positions, other than those related to liabilities, that are deducted from Tier 1 capital as per Prudent valuation guidance set out in the Basel framework, should be deducted from the Leverage ratio exposure measure.
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| 6.3 | Deducting Liability items from the Leverage ratio exposure measure is not allowed. For example, gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to changes in the bank's own credit risk as described in the Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities section in of the Finalized Guidance Document Concerning the Implementation of Basel III circular No. 341000015689 issued by SAMA dated 19 December in 2012 and any subsequent adjustments, must not be deducted from the Leverage ratio exposure measure.
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| 6.4 | With regard to traditional securitizations, the originating bank may exclude securitized exposures from its leverage ratio exposure measure if the securitization meets the operational requirements for the recognition of risk transference2. Banks meeting these conditions must include any retained securitization exposures in their leverage ratio exposure measure. In all other cases, traditional securitizations exposures that do not meet the operational requirements for the recognition of risk transference or synthetic securitizations, the securitized exposure must be included in the Leverage ratio exposure measure.
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| 6.5 | Banks should be particularly cautious to transactions and structures that have the result of inadequately capturing banks' sources of Leverage. Examples of concerns that might arise in such Leverage ratio exposure measure minimizing transactions and structures include the following:
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| | (i) | Securities financing transactions where 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 (i.e. the credit quality of the counterparty falls when the value of the securities falls);
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| | (ii) | Banks that normally act as principal but adopt an agency model to transact in derivatives and SFTs in order to benefit from the more favorable treatment permitted for agency transactions under the Leverage ratio framework;
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| | (iii) | Collateral swap trades structured to mitigate inclusion in the leverage ratio exposure measure; or use of structures to move assets off the balance sheet.
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| | The above list of examples is by no means exhaustive.
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| 6.6 | SAMA reserves should be included in the Leverage exposure measure. SAMA may temporarily exempt central bank reserves from the Leverage ratio exposure measure in exceptional cases and when it deems necessary.
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