BCBS revised the leverage ratio disclosure requirements and the treatment of client cleared derivatives for calculating leverage ratio. Revisions to the disclosure requirements are intended to reduce excessive volatility in bank exposures around key reference dates. Both revisions will be applicable to the version of the leverage ratio standard that will come into effect on January 01, 2022.
The revised leverage ratio treatment of client cleared derivatives sets out a targeted revision of the leverage ratio measurement of client cleared derivatives to align it with the standardized approach to measuring counterparty credit risk exposures (SA-CCR). This treatment permits both cash and non-cash forms of segregated initial margin and cash and non-cash variation margin received from a client to offset the replacement cost and potential future exposure for client cleared derivatives only. This limited revision balances the robustness of the leverage ratio as a non-risk-based safeguard against unsustainable sources of leverage with the policy objective set by the G20 Leaders to promote central clearing of standardized derivative contracts. BCBS revised this treatment following its evaluation of the impact of the leverage ratio on banks' provision of client clearing services and the evaluation of quantitative and qualitative information on banks' exposures to client cleared derivatives.
The revisions to leverage ratio disclosure requirements set out additional requirements for banks to disclose their leverage ratios based on quarter-end and daily average values of securities financing transactions. A comparison of the two sets of values will allow market participants to better assess banks' actual leverage throughout the reporting period. BCBS has finalized this disclosure requirement to address concerns expressed in a newsletter published last year regarding the potential regulatory arbitrage by banks in the form of window-dressing. The concern was that temporary reductions of transaction volumes around reference dates result in the reporting and public disclosure of artificially elevated leverage ratios. BCBS will continue to carefully monitor the potential window-dressing behavior by banks. BCBS has also published revisions to the Pillar 3 disclosure templates and instructions that will serve to implement these revised disclosure requirements.
Keywords: International, Banking, Leverage Ratio, Derivatives, Pillar 1, Pillar 3, SA-CCR, Reporting, G20, Disclosures, Credit Risk, Window Dressing Behavior, Basel III, BCBS
Previous ArticleQFCRA Amends Business Prudential Rules Related to Leverage Ratio
BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.
BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.
EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.
BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.
ECB published a letter in which the President Christine Lagarde answered questions, from a Member of the European Parliament, on the application of the EU taxonomy on sustainable finance.
PRA published a direction for modification by consent of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook.
BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.
In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.