In January 2014, the Basel Committee on Banking Supervision finalized its revisions to the Basel III leverage ratio. Compared to its June 2013 proposed revisions, the Basel Committee has made several important changes to the denominator of the Basel III leverage ratio, including with respect to the treatment of derivatives, securities financing transactions and certain off-balance sheet items.
Visual Overview of the Revised Basel III Leverage Ratio
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Key Differences Between January 2014 Revisions and June 2013 Proposal
| Topic |
June 2013 Proposal |
Revised Basel III Leverage Ratio |
| Derivatives collateral |
- A bank must gross up its Exposure Measure for derivatives by the amount of any collateral received or provided by the bank where the collateral has reduced its on-balance sheet assets under applicable accounting standards.
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- The general gross-up requirements are retained, subject to an important exception for cash variation margin.
- Cash variation margin may be used to reduce the Exposure Measure for derivatives if certain conditions are met.
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| Centrally cleared derivatives |
- Centrally cleared derivative transactions are subject to the same treatment as non-cleared derivatives.
- Under the principal clearing model, where a clearing member bank intermediates itself as principal between a client and a central counterparty (CCP), both legs of the transaction (the client-facing leg and the CCP-facing leg) would count towards the Exposure Measure.
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- The CCP-facing leg in a client clearing arrangement may be excluded from the Exposure Measure if the clearing member is not contractually obligated to reimburse the client for any losses suffered due to changes in the value of the client’s transactions in the event that the CCP defaults.
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| Written credit derivatives |
- The effective notional amount of a written credit derivative is added to the Exposure Measure to capture the bank’s exposure to the reference entity.
- The notional amount of a written credit derivative may be reduced by the notional amount of a purchased credit derivative on the same reference name and same level of seniority if the remaining maturity of the purchased credit derivative ≥ the remaining maturity of the written credit derivative.
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- For single-name credit derivatives, allows the notional amount of a written credit derivative to be reduced by the notional amount of a purchased credit derivative on the same reference name with remaining maturity ≥ remaining maturity of the written credit derivative if the reference obligation ranks pari passu with or is junior to the reference obligation of the written credit derivative.
- For tranched products, the purchased credit protection must be on a reference obligation with the same level of seniority.
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| Securities financing transactions |
- A bank must include its gross SFT assets in the Exposure Measure.
- This means that SFT cash payables may not be netted against SFT cash receivables.
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- SFT cash payables and SFT cash receivables with the same counterparty may be netted if certain conditions are met.
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| Off-balance sheet items |
- The Exposure Measure of an OBS item is generally calculated by multiplying the notional amount of the item by a credit conversion factor (CCF) of 100%.
- There is an exception for a commitment that is unconditionally cancelable at any time by the bank without prior notice, to which a 10% CCF applies.
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- Instead of a uniform 100% CCF, a bank is permitted to use the standardized credit conversion factors in the Basel risk-based capital framework to calculate the Exposure Measure for OBS items.
- The standardized CCFs in the Basel risk-based capital framework generally range from 10% to 100%, depending on the type of transaction.
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The full visual memorandum, which uses diagrams, comparison tables, examples and formulas to illustrate the Basel Committee’s revisions to the Basel III leverage ratio and potential U.S. implementation issues, is available here.
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