| 7.3.1 | SFTs such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin-lending transactions where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements, are included in the Leverage ratio exposure measure.
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| 7.3.2 | The treatment recognizes that secured lending and borrowing in the form of SFTs is an important source of Leverage, and ensures consistent international implementation by providing a common measure for dealing with the main differences in the operative accounting frameworks.
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Treatment of Securities financing transaction exposures:
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| 7.3.3 | Bank acting as principal (General treatment): the sum of the amounts below must be included in the Leverage ratio exposure measure:
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| | (i) | Gross SFT assets16 recognized for accounting purposes (i.e. with no recognition of accounting netting)17 will be adjusted as follows:
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| | | a. | Excluding from the Leverage ratio exposure measure the value of any securities received under an SFT, where the bank has recognized the securities as an asset on its balance sheet.
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| | | b. | Cash payables and cash receivables in SFTs with the same counterparty may be measured net if all the following criteria are met:
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| | | | ■ | Transactions have the same explicit final settlement date; in particular, transactions with no explicit end date but which can be unwound at any time by either party to the transaction are not eligible;
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| | | | ■ | The right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of the counterparty's default; insolvency; or bankruptcy;
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| | | | ■ | The counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement - that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date. To achieve such equivalence both transactions are settled through the same settlement system and the settlement arrangements are 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 issues arising from the securities legs of the SFTs do not interfere with the completion of the net settlement of the cash receivables and payables. In particular, this latter condition means that 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. If there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross.18
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| | (ii) | A measure of CCR calculated as the current exposure without an add-on for PFE, should be calculated as follows:
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| | | a. | Where a qualifying MNA19 is in place, the current exposure (E*) is the greater of zero and the total fair value of securities and cash lent to a counterparty for all transactions included in the qualifying MNA (∑Ei), less the total fair value of cash and securities received from the counterparty for those transactions (∑Ci). This is illustrated in the following formula:
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E* = max {0, [∑Ei -∑ Ci]}
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| | | b. | Where no qualifying MNA is in place, the current exposure for transactions with a counterparty must be calculated on a transaction-by-transaction basis - that is, each transaction i is treated as its own netting set, as shown in the following formula:
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Ei* = max {0, [Ei - Ci]}
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| | | | Where Ei* may be set to zero if:
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| | | | ■ | Ei is the cash lent to a counterparty.
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| | | | ■ | This transaction is treated as its own netting set and
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| | | | ■ | The associated cash receivable is not eligible for the netting treatment in paragraph 7.3.3 (i).
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| | | For the purposes of the above subparagraph, the term “counterparty” includes not only the counterparty of the bilateral repo transactions but also triparty repo agents that receive collateral in deposit and manage the collateral in the case of triparty repo transactions. Therefore, securities deposited at triparty repo agents are included in “total value of securities and cash lent to a counterparty” (E) up to the amount effectively lent to the counterparty in a repo transaction. However, excess collateral that has been deposited at triparty agents but that has not been lent out may be exclude.
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| 7.3.4 | Securities financing transaction exposures calculation:
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| | (i) | The effects of bilateral netting agreements20 for covering SFTs will be recognized on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:
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| | | a. | Provide the non-defaulting party with the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
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| | | b. | Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
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| | | c. | Allow for the prompt liquidation or setoff of collateral upon the event of default; and
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| | | d. | Be together with the rights arising from provisions required in (a) and (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default regardless of the counterparty's insolvency or bankruptcy.
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| | (ii) | Netting across positions held in the banking book and trading book will only be recognized when the netted transactions fulfil the following conditions:
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| | | a. | All transactions are marked to market daily; and
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| | | b. | The collateral instruments used in the transactions are recognized as eligible financial collateral in the banking book
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| 7.3.5 | Sale accounting transactions: Leverage may remain with the lender of the security in an SFT whether or not sale accounting is achieved under the operative accounting framework. If the sale accounting is achieved for an SFT under the bank's operative accounting framework, the bank must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction under the operative accounting framework. I.e. the bank must include the sum of amounts in subparagraphs (i) and (ii) of paragraph 7.3.3 for such an SFT) for the purpose of determining its Leverage ratio exposure measure.
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| 7.3.6 | Bank acting as agent:
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| | (i) | A bank acting as agent in an SFT provides Indemnity or guarantee to only one of the two parties involved, 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. In this situation, the bank is exposed to the counterparty of its customer for the difference in values rather than to the full exposure to the underlying security or cash of the transaction (as is the case where the bank is one of the principals in the transaction).
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| | (ii) | A bank acting as agent in an SFT provides Indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided and the bank does not own or control the underlying cash or security resource, then the bank will be required to calculate its Leverage ratio exposure measure by applying only measure of CCR calculated as the current exposure without an add-on for PFE (subparagraph (ii) of paragraph 7.3.3). In addition to the conditions mentioned from paragraph 7.3.3 to 7.3.6 bank acting as an agent in an SFT does not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and therefore need not recognize those SFTs in its Leverage ratio exposure measure.
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| | (iii) | A bank acting as agent in an SFT provides Indemnity or guarantee to a customer or counterparty will be considered eligible for the exceptional treatment above only if the bank's exposure to the transaction is limited to the guaranteed difference between the values of the security or cash its customer has lent and the value of the collateral the borrower has provided. In situations where the bank is further economically exposed (i.e. beyond the guarantee for the difference) to the underlying security or cash in the transaction, a further exposure equal to the full amount of the security or cash must be included in the Leverage ratio exposure measure. For example, due to the bank managing collateral received in the bank's name or on its own account rather than on the customer's or borrower's account (eg by on-lending or managing unsegregated collateral, cash or securities). However, this does not apply to client omnibus accounts that are used by agent lenders to hold and manage client collateral provided that client collateral is segregated from the bank's proprietary assets and the bank calculates the exposure on a client-by-client basis.
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| | (iv) | A bank acting as agent in an SFT provides Indemnity or guarantee to both parties involved in an SFT (i.e. securities lender and securities borrower), the bank will be required to calculate its Leverage ratio exposure measure in accordance with paragraph 7.3.3 to 7.3.6 separately for each party involved in the transaction.
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