June 26, 2019

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.

 

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Keywords: International, Banking, Leverage Ratio, Derivatives, Pillar 1, Pillar 3, SA-CCR, Reporting, G20, Disclosures, Credit Risk, Window Dressing Behavior, Basel III, BCBS

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