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    SARB on Calculation of Derivative Exposure to Determine Leverage Ratio

    December 08, 2020

    SARB published a Directive (D7/2020) that specifies requirements for the calculation of derivative exposure amount for determining the leverage ratio. The SARB Prudential Authority had earlier proposed amendments to the Regulations relating to Banks (Regulations) to replace the current exposure method with the standardized approach for measuring counterparty credit risk exposures (SA-CCR) for calculating the relevant amount related to a bank’s derivative exposures for risk-based capital requirements. These proposed changes require the Prudential Authority to specify requirements for the calculation of the derivative exposures for the purposes of determining the leverage ratio. Banks must comply with this Directive simultaneously with the implementation of the amended Regulations that incorporate the SA-CCR methodology.

    Regulation 38(15) of the Regulations requires banks to determine the leverage ratio to supplement the relevant risk-based capital requirements of banks. This includes the calculation of the qualifying tier 1 capital and reserve funds and the exposure measure. BCBS published the final framework for SA-CCR in March 2014. The SA-CCR is a new method of calculating exposure at default for counterparty credit risk, which arises from over the counter derivatives, exchange-traded derivatives, and long-settlement transactions. In accordance with the provisions of section 6(6) of the Banks Act, 1990, banks are hereby directed to calculate exposures associated with all derivative transactions, including where a bank sells protection using a credit derivative, through the application of the formula specified in the Directive (D7/2020). 

    In case of a derivative exposure covered by an eligible bilateral netting contract or agreement that complies with the relevant requirements specified in regulation 23(18)(b) of the amended Regulations that incorporated the requirements related to the SA-CCR, a bank shall calculate its exposure in respect of the relevant set of derivative exposures covered by the said contract or agreement as the sum of the net mark-to-market replacement cost, plus the potential future exposure. For derivative transactions not covered by an eligible bilateral netting contract or an agreement as specified in regulation 23(18)(b) of the amended Regulations that incorporated the requirements related to SA-CCR, the amount to be included in the leverage ratio exposure measure must be determined separately for each transaction. The Directive also specifies requirements related to collateral, cash variation margin, bank as a clearing member, and written credit derivative.


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    Keywords: Middle East and Africa, South Africa, Banking, Leverage Ratio, Basel, Derivatives, SA-CCR, Counterparty Credit Risk, SARB

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