Leverage Requirements Guideline (2019) - osfi-bsif.gc.ca

Institutions are expected to maintain a leverage ratio that meets or exceeds 3% at all times. The Superintendent also prescribes authorized ... Skiptomaincontent Skiptosecondarymenu LeverageRequirementsGuideline(2019) PageContent AlternativeFormats PDF,398KB AccompanyingDocuments GuidelineImpactAnalysisStatement Letter DocumentProperties TypeofPublication:Guideline EffectiveDate:November2018/January2019Footnote1 Audiences:Banks/BHC/T&L/CRA Subsections485(1)and949(1)oftheBankAct(BA)andsubsection473(1)oftheTrustandLoanCompaniesAct(TLCA)andsubsection409(1)oftheCooperativeCreditAssociationsAct(CCAA)requirebanks,bankholdingcompanies,trustandloancompanies,andcooperativeretailassociations,respectively,tomaintainadequatecapital.TheLeverageRequirementsGuidelineisnotmadepursuanttosubsections485(2)or949(2)oftheBA,tosubsection473(2)oftheTLCA,ortosubsection409(2)oftheCCAA.However,theleveragerequirementssetoutinthisguideline,togetherwiththecapitalstandardsspecifiedintheCapitalAdequacyRequirements(CAR)Guideline,providetheframeworkwithinwhichtheSuperintendentassesseswhetherabankoratrustorloancompanymaintainsadequatecapitalpursuanttotheActs.Forthispurpose,theSuperintendenthasestablishedtwominimumstandards:theleverageratiodescribedinthisGuideline,andtherisk-basedcapitalratiosetoutintheCARGuideline.Thefirsttestprovidesanoverallmeasureoftheadequacyofaninstitution'scapital.Thesecondmeasurefocusesonriskfacedbytheinstitution.Notwithstandingthatabank,bankholdingcompany,atrustandloancompany,orcooperativecreditassociationmaymeetthesestandards,theSuperintendentmaydirectabankorbankholdingcompanytoincreaseitscapitalundersubsections485(3)or949(3)oftheBA,atrustandloancompanytoincreaseitscapitalundersubsection473(3)oftheTLCA,oracooperativeretailassociationtoincreaseitscapitalundersection409(3)oftheCCAA. OSFI,asamemberoftheBaselCommitteeonBankingSupervision,participatedinthedevelopmentoftheinternationalleverageratioframework,BaselIIIleverageratioframeworkanddisclosurerequirements(January2014),aswellastherevisionstotheframeworkundertheBaselIIIreformsinDecember2017.ThisdomesticguidanceisbasedontheBaselIIIleverageratioframework. Whererelevant,theBaselIIIleverageratioframeworkparagraphnumbersareprovidedinsquarebracketsattheendofeachparagraphreferencingmaterialfromtheBaselIIIleverageratioframework. TableofContents Overview ScopeofApplication Calculationofleveragerequirements Minimumandauthorizedleveragerequirements CapitalMeasure ExposureMeasure (a)Onbalancesheetexposures (b)Derivativeexposures (i)Treatmentofderivatives (ii)Treatmentofclearingservices (iii)Additionaltreatmentofwrittencreditderivatives (c)Securitiesfinancingtransaction(SFT)exposures (i)Generaltreatment(institutionactingasaprincipal) (ii)Qualifyingmasternettingagreement (iii)Saleaccountingtransactions (iv)Institutionactingasanagentprovidinganindemnityforcreditrisk (d)Offbalancesheetexposures Overview Outlinedbelowaretheleveragerequirementsforbanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,federallyregulatedloancompaniesandcooperativeretailassociations,collectivelyreferredtoas'institutions'. PartsofthisguidelinearedrawnfromtheBaselCommitteeonBankingSupervision(BCBS)BaselIIIleverageratioframework,entitled:BaselIIIleverageratioframeworkanddisclosurerequirements(January2014),theBCBSFrequentlyaskedquestionsontheBaselIIIleverageratioframework(October2014),andtherevisedleverageratioframeworksetoutinBaselIII:Finalizingpost-crisisreforms(December2017).Forreference,theBaseltextparagraphnumbersandFAQpagenumbersthatareassociatedwiththetextappearinginthisguidelineareindicatedinsquarebracketsattheendofeachparagraphFootnote2. ScopeofApplication Theseleveragerequirementsapplyonaconsolidatedbasisandapplytoallinstitutionsasdefinedinparagraph1aboveFootnote3.Theconsolidatedentityincludesallsubsidiariesexceptinsurancesubsidiaries.Thisisconsistentwiththescopeofregulatoryconsolidationusedundertherisk-basedcapitalframeworkassetoutinSection1.1ofOSFI'sCapitalAdequacyRequirements(CAR)Guideline. [BCBSJan2014par8] Treatmentofinvestmentsinthecapitalofbanking,financial,insuranceandcommercialentitiesthatareoutsidetheregulatoryscopeofconsolidation:whereabanking,financial,insuranceorcommercialentityisoutsidethescopeofregulatoryconsolidation,onlytheinvestmentinthecapitalofsuchentities(i.e.,onlythecarryingvalueoftheinvestment,asopposedtotheunderlyingassetsandotherexposuresoftheinvestee)istobeincludedintheleverageratioexposuremeasure.However,investmentsinthecapitalofsuchentitiesthataredeductedfromTier1capitalassetoutinparagraph15maybeexcludedfromtheleverageratioexposuremeasure. [BCBSJan2014par9] Calculationofleveragerequirements Theleverageratioisdefinedasthecapitalmeasure(thenumerator)dividedbytheexposuremeasure(thedenominator),withthisratioexpressedasapercentage: Leverageratio=CapitalMeasure/ExposureMeasure [BCBSJan2014par6] Minimumandauthorizedleverageratios Institutionsareexpectedtomaintainaleverageratiothatmeetsorexceeds3%atalltimes.TheSuperintendentalsoprescribesauthorizedleverageratiorequirementsforindividualinstitutions.Authorizedleverageratiosarecommunicatedtoindividualinstitutionsonabilateralbasis.TheauthorizedleverageratioisconsideredsupervisoryinformationandisnotpermittedtobedisclosedundertheSupervisoryInformationRegulationsFootnote4. Whensettingauthorizedleverageratiosandwhenassessingwhetheranincreaseoradecreaseintheinstitution'sauthorizedleverageratioisappropriate,OSFIwilltakeintoaccountthefollowingfactors: thepotentialimpactofthechangeintheleverageratioontheinstitution'srisk-basedcapitalratioscomparedtointernaltargetsandOSFItargets; theeffectivenessofoperationalmanagementandoversightfunctions; theadequacyofcapitalandliquiditymanagementprocessesandprocedures; theinterventionhistoryFootnote5oftheinstitution; theinstitution'sriskprofileandbusinesslines(includingdiversificationofexposures);and theinstitution'sstrategicandbusinessplans. RequestsfordecreasesinauthorizedleverageratiosshouldbeaddressedtotheLegislationandApprovalsDivisionFootnote6,withacopytotheLeadSupervisor,andshouldalsoincludeabusinesscasethat,ataminimum,setsout: thereasonwhyadecreaseisrequested; financialprojectionsincludinggrowthbybusinessline;and theexpectedimpactoftheprojectedgrowthonprofitability,liquidity,andrisk-basedcapitalratios. Aspartofitsinterventionstrategyforinstitutions,OSFImayincreasetheinstitution'sauthorizedleverageratioand,ifso,mayrequiretheinstitutiontofilewithOSFIanactionplanforachievingthehigherauthorizedlevel. CapitalMeasure ThecapitalmeasureusedfortheleverageratioistheTier1capitaloftheinstitutionasdefinedinChapter2oftheCARGuideline.Therefore,thecapitalmeasureusedfortheleverageratioatanyparticularpointintimeistheTier1capitalmeasureapplyingatthattimeundertherisk-basedcapitalframework. [BCBSJan2014par10] ExposureMeasure Theexposuremeasurefortheleverageratioshouldgenerallyfollowtheaccountingvalue,subjecttothefollowing: on-balancesheet,non-derivativeexposuresareincludedintheexposuremeasurenetofspecificorgeneralprovisionsoraccountingvaluationadjustments(e.g.,accountingcreditvaluationadjustments); nettingofloansanddepositsisnotallowed. [BCBSJan2014par12] Unlessspecifieddifferentlyinthisguideline,institutionsmustnottakeaccountofphysicalorfinancialcollateral,guaranteesorothercreditriskmitigationtechniquestoreducetheexposuremeasure. [BCBSJan2014par13] Aninstitution'stotalexposuremeasureisthesumofthefollowingexposures:(a)on-balancesheetexposures;(b)derivativeexposures;(c)securitiesfinancingtransaction(SFT)exposures;and(d)off-balancesheet(OBS)items.Thespecifictreatmentsforthesefourmainexposuretypesaredefinedbelow. [BCBSJan2014par14] (a)Onbalancesheetexposures Institutionsmustincludeallbalancesheetassetsintheirexposuremeasure,includingon-balancesheetderivativescollateralandcollateralforSFTs,withtheexceptionofon-balancesheetderivativeandSFTassetsthatarecoveredinparagraphs21to38below. [BCBSJan2014par15] However,toensureconsistency,balancesheetassetsdeductedfromTier1capital(assetoutinsection2.3oftheCARGuideline)maybedeductedfromtheexposuremeasure.Twoexamplesfollow: Whereabanking,financialorinsuranceentityisnotincludedintheregulatoryscopeofconsolidationassetoutinparagraph4ofthisguideline,theamountofanyinvestmentinthecapitalofthatentitythatistotallyorpartiallydeductedfromCET1capitalorfromAdditionalTier1capitaloftheinstitutionfollowingthecorrespondingdeductionapproachinparagraphs77to83ofChapter2oftheCARGuidelinemustalsobedeductedfromtheexposuremeasure. Forinstitutionsusingtheinternalratings-based(IRB)approachtodeterminingcapitalrequirementsforcreditrisk,paragraph57ofChapter2oftheCARGuidelinerequiresanyshortfallinthestockofeligibleprovisionsrelativetoexpectedlossestobedeductedfromCET1capital.Thesameamountmustbedeductedfromtheexposuremeasure. [BCBSJan2014par16] Liabilityitemsmustnotbedeductedfromthemeasureofexposure.Forexample,gains/lossesonfairvaluedliabilitiesoraccountingvaluationadjustmentsonderivativeliabilitiesduetochangesintheinstitution'sowncreditriskasdescribedinparagraph64oftheChapter2oftheCARGuidelinemustnotbedeductedfromtheexposuremeasure. [BCBSJan2014par17] Withregardtotraditionalsecuritizations,anoriginatinginstitutionmayexcludesecuritizedexposuresfromitsleverageratioexposuremeasureifthesecuritizationmeetstheoperationalrequirementsfortherecognitionofrisktransferenceassetoutinparagraph27ofChapter7oftheCARGuideline.Institutionscanalsoapplythetransitionalarrangementsdescribedinsection7.12ofChapter7oftheCARGuideline.Institutionsmeetingtheseconditionsmustincludeanyretainedsecuritizationexposuresintheirleverageratioexposuremeasure.Inallothercases(e.g.,traditionalsecuritizationsthatdonotmeettheoperationalrequirementsfortherecognitionofrisktransferenceorsyntheticsecuritisations),thesecuritizedexposuresmustbeincludedintheleverageratioexposuremeasureunlessotherwiseinstructedbyOSFI. [BCBSDec2017par24] SpecificcaseswhereOSFIguidancehasbeenprovided Inthecaseofmortgagewholeloansaletransactionshavingthefollowingcharacteristics,thebalancesheetexposurewillbeconsideredtobesubstantiallyreducedandtheinstitutionwillnotberequiredtoincludesoldloansintheexposuremeasure. ThemortgagesareinsuredbyCMHCoraprivateinsurerrecognizedbytheProtectionofResidentialMortgageorHypothecaryInsuranceAct; Theinstitutionhasretainedtheoption,nottheobligationtorepurchasethemortgagesatparfromtheinvestorattheendoftheircontractualterm.; Theinstitutionmaycontinuetoadministerandservicemortgagesfortheinvestorfollowingthesalebuttheinstitutionisnotobligatedtoadvanceuncollectedmortgagepaymentsonaccountofdelinquentordefaultedmortgages;and Theinvestorhastherighttosellthemortgagestoathirdpartyatanytime. Mortgagesinsuredasperparagraph18(a)abovefortheirwholelife,thathavebeenpooledandsoldasNationalHousingActMortgageBackedSecurities(NHAMBSorNHAMBSProgram)andderecognizedunderIFRSfollowingatransactionwithathirdpartywithrespecttotheinstitution'sretainedinterestinanyexcessspread,canbeexcludedfromtheexposuremeasure.SuchexclusionissubjecttotheinstitutionobtainingwrittenconfirmationfromCMHCthatCMHCdoesnotobjecttotheinstitutionproceedingwithsuchatransactionorsimilartransactions.However,recognizingthepotentialliquidityconstraintsimposedbytheNHAMBSProgramoninstitutionsinastressedenvironment,institutionsmustbeabletodemonstratealignmentwithOSFI'sB-6LiquidityGuideline,LiquidityAdequacyRequirementsGuideline,andotherliquidityrequirementsasnecessaryand/orspecifiedbyOSFI.Thisincludesinstitutionshavinginplaceappropriateliquidityplansthatdemonstratethemanagementofliquidityrisks,includinganappropriateladderingofthescheduledmaturitiesforalloutstandingNHAMBSandon-goingtrackingofcashflowsagainstthoseplans. ThegrandfatheringtreatmentofmortgagessoldthroughCMHCprograms(whichincludesNationalHousingActMortgage-BackedSecurities(NHAMBS)andCanadaMortgageBond(CMB)Programs,aswellasInsuredMortgagePurchaseProgram(IMPP))permittedunderOSFI'sMarch2010AdvisoryConversiontoInternationalFinancialReportingStandards(IFRSs)byFederallyRegulatedEntitieswheresuchassetswereexcludedfromOSFI'spreviousAssetstoCapitalMultiple(ACM)testispermittedundertheleverageratio. (b)Derivativeexposures (i)Treatmentofderivatives Institutionsmustcalculatetheirderivativeexposures,includingwhereaninstitutionsellsprotectionusingacreditderivative,asascalar,alphaequalto1.4,multipliedbythesumofthereplacementcost(RC)Footnote7forthecurrentexposureandanadd-onforpotentialfutureexposure(PFE),asdescribedinsection4.1.6oftheCARGuideline.Thetreatmentfortradeswherespecificwrong-wayrisk(SWWR)hasbeenidentifiedunderparagraph148ofChapter4oftheCARGuidelinedoesnotapplyforpurposesofcalculatingderivativeexposuresinthisGuideline.Instead,theexposureforthesetradesshouldbecalculatedasifSWWRwasnotpresentaccordingtosection4.1.6ofChapter4oftheCARGuideline.Writtencreditderivativesaresubjecttoanadditionaltreatment,assetoutinparagraphs26to30below. [BCBSJan2014par19] Inadditiontothetreatmentinparagraph21,inthecaseofcashvariationmarginprovidedtoacounterparty,thepostinginstitutionmaydeducttheresultingreceivablefromitsleverageratioexposuremeasure,wherethecashvariationmarginhasbeenrecognizedasanassetundertheinstitution'soperativeaccountingframework(e.g.,IFRS). (ii)Treatmentofclearingservices Whereaninstitutionactingasclearingmember(CM)Footnote8offersclearingservicestoclients,theCM'stradeexposuresFootnote9tothecentralcounterparty(CCP)Footnote10thatarisewhentheCMisobligatedtoreimbursetheclientforanylossessufferedduetochangesinthevalueofitstransactionsintheeventthattheCCPdefaults,mustbecapturedbyapplyingthesametreatmentthatappliestoanyothertypeofderivativestransactions.However,iftheCM,basedonthecontractualarrangementswiththeclient,isnotobligatedtoreimbursetheclientforanylossessufferedintheeventthataQCCPdefaults,theCMneednotrecognizetheresultingtradeexposurestotheQCCPintheleverageratioexposuremeasureFootnote11.Inaddition,whereainstitutionprovidesclearingservicesasa"higherlevelclient"withinamulti-levelclientstructureFootnote12,theinstitutionneednotrecognizeinitsleverageratioexposuremeasuretheresultingtradeexposuretotheCMortoanentitythatservesasahigherlevelclienttotheinstitutionintheleverageratioexposuremeasureifitmeetsallofthefollowingconditions: TheoffsettingtransactionsareidentifiedbytheQCCPashigherlevelclienttransactionsandcollateraltosupportthemisheldbytheQCCPand/ortheCM,asapplicable,underarrangementsthatpreventanylossestothehigherlevelclientdueto:(i)thedefaultorinsolvencyoftheCM;(ii)thedefaultorinsolvencyoftheCM'sotherclients,and(iii)thejointdefaultofinsolvencyoftheCMandanyofitsotherclients;Footnote13 Theinstitutionmusthaveconductedsufficientlegalreview(andundertakensuchfurtherreviewasnecessarytoensurecontinuingenforceability)andhaveawell-foundedbasistoconcludethat,intheeventoflegalchallenge,therelevantcourtsandadministrativeauthoritieswouldfindthatsucharrangementmentionedabovewouldbelegal,valid,bindingandenforceableunderrelevantlawsoftherelevantjurisdiction(s); Relevantlaws,regulations,rules,contractualoradministrativearrangementsprovidethattheoffsettingtransactionswiththedefaultedorinsolventCMarehighlylikelytocontinuetobeindirectlytransactedthroughtheQCCP,orbytheQCCP,iftheCMdefaultsorbecomesinsolventFootnote14.Insuchcircumstances,thehigherlevelclientpositionsandcollateralwiththeQCCPwillbetransferredatmarketvalueunlessthehigherlevelclientrequeststocloseoutthepositionatmarketvalue;and TheinstitutionisnotobligatedtoreimburseitsclientforanylossessufferedintheeventofdefaultofeithertheCMortheQCCP. [BCBSDec2017par41] WhereacliententersdirectlyintoaderivativestransactionwiththeCCPandtheCMguaranteestheperformanceofitsclients'derivativetradeexposurestotheCCP,theinstitutionactingastheCMfortheclienttotheCCPmustcalculateitsrelatedleverageratioexposureresultingfromtheguaranteeasaderivativeexposureassetoutinparagraphs21to30ofthisguideline,asiftheinstitutionhadentereddirectlyintothetransactionwiththeclient. [BCBSJan2014par28] AnaffiliateentitytotheinstitutionactingasaCMmaybeconsideredaclientforthepurposeofparagraph23and24ifitisoutsidetherelevantscopeofregulatoryconsolidationatthelevelatwhichtheleverageratioisappliedasspecifiedinparagraph4.Incontrast,ifanaffiliateentityfallswithintheregulatoryscopeofconsolidation,thetradebetweentheaffiliateentityandtheCMiseliminatedinthecourseofconsolidation,buttheCMstillhasatradeexposuretotheQCCP,whichwillbeconsideredproprietaryandtheexemptioninparagraph23nolongerapplies. [BCBSFAQ#3,page3] (iii)Additionaltreatmentofwrittencreditderivatives Inadditiontothecounterpartycreditrisk(CCR)exposurearisingfromthefairvalueofthecontracts,writtencreditderivativescreateanotionalcreditexposurearisingfromthecreditworthinessofthereferenceentity.Thereforewrittencreditderivativeswillbetreatedconsistentlywithcashinstruments(e.g.,loans,bonds)forthepurposesoftheexposuremeasure. [BCBSJan2014par29] Inordertocapturethecreditexposuretotheunderlyingreferenceentity,inadditiontotheaboveCCRtreatmentforderivatives,theeffectivenotionalamountFootnote15referencedbyawrittencreditderivativeistobeincludedintheexposuremeasure,unlessthewrittencreditderivativeisincludedinatransactionclearedonthebehalfofaclientoftheinstitutionactingasaCM(oractingasaclearingservicesproviderinamulti-levelclientstructureasreferencedinparagraph23)andthetransactionmeetstherequirementsofparagraph23fortheexclusionoftradeexposurestotheQCCP(or,inthecaseofamulti-levelclientstructure,therequirementsofparagraph23fortheexclusionoftradeexposurestotheCMortheQCCP).TheeffectivenotionalamountofawrittencreditderivativemaybereducedbyanynegativechangeinfairvalueamountthathasbeenincorporatedintothecalculationofTier1capitalwithrespecttothewrittencreditderivative.Theresultingamountmaybefurtherreducedbytheeffectivenotionalamountofapurchasedcreditderivativeonthesamereferencenameprovided: thecreditprotectionpurchasedthroughcreditderivativesisotherwisesubjecttothesameormoreconservativematerialtermsasthoseinthecorrespondingwrittencreditderivative.Thisensuresthatifaninstitutionprovideswrittenprotectionviasometypeofcreditderivative,theinstitutionmayonlyrecogniseoffsettingfromanotherpurchasedcreditderivativetotheextentthatthepurchasedprotectioniscertaintodeliverapaymentinallpotentialfuturestates.Materialtermsincludethelevelofsubordination,optionality,creditevents,referenceandanyothercharacteristicsrelevanttothevaluationofthederivative;Footnote16 theremainingmaturityofthecreditprotectionpurchasedisequaltoorgreaterthantheremainingmaturityofthewrittencreditderivative; Thecreditprotectionpurchasedthroughcreditderivativesisnotpurchasedfromacounterpartywhosecreditqualityishighlycorrelatedwiththevalueofthereferenceobligationinthesensespecifiedinparagraph73ofChapter4oftheCARGuideline.Footnote17; Intheeventthattheeffectivenotionalamountofawrittencreditderivativeisreducedbyanynegativechangeinfairvaluereflectedintheinstitution'sTier1capital,theeffectivenotionalamountoftheoffsettingcreditprotectionpurchasedthroughcreditderivativesmustalsobereducedbyanyresultingpositivechangeinfairvaluereflectedinTier1capital;and Thecreditprotectionpurchasedthroughcreditderivativesisnotincludedinatransactionthathasbeenclearedonbehalfofaclient(orthathasbeenclearedbytheinstitutioninitsroleasaclearingservicesproviderinamulti-levelclientservicesstructureasreferencedinparagraph23)andforwhichtheeffectivenotionalamountreferencedbythecorrespondingwrittencreditderivativeisexcludedfromtheleverageratioexposuremeasureaccordingtothisparagraph. [BCBSDec2017par45] Forthepurposesofparagraph27,theterm"writtencreditderivative"referstoabroadrangeofcreditderivativesthroughwhichainstitutioneffectivelyprovidescreditprotectionandisnotlimitedsolelytocreditdefaultswapsandtotalreturnswaps.Forexample,alloptionswheretheinstitutionhastheobligationtoprovidecreditprotectionundercertainconditionsqualifyas"writtencreditderivatives".Theeffectivenotionalamountofsuchoptionssoldbytheinstitutionmaybeoffsetbytheeffectivenotionalamountofoptionsbywhichtheinstitutionhastherighttopurchasecreditprotectionwhichfulfilstheconditionsofparagraph27.Forexample,theconditionofsameormoreconservativematerialtermsasthoseinthecorrespondingwrittencreditderivativesasreferencedinparagraph27canbeconsideredmetonlywhenthestrikepriceoftheunderlyingpurchasedcreditprotectionisequaltoorlowerthanthestrikepriceoftheunderlyingsoldcreditprotection. [BCBSDec2017par46] Forpurposesofparagraph27,tworeferencenamesareconsideredidenticalonlyiftheyrefertothesamelegalentity.Creditprotectiononapoolofreferencenamespurchasedthroughcreditderivativesmayoffsetcreditprotectionsoldonindividualreferencenamesifthecreditprotectionpurchasediseconomicallyequivalenttopurchasingcreditprotectionseparatelyoneachoftheindividualnamesinthepool(thiswould,forexample,bethecaseifainstitutionweretopurchasecreditprotectiononanentiresecuritisationstructure).Ifainstitutionpurchasescreditprotectiononapoolofreferencenamesthroughcreditderivatives,butthecreditprotectionpurchaseddoesnotcovertheentirepool(ietheprotectioncoversonlyasubsetofthepool,asinthecaseofannth-to-defaultcreditderivativeorasecuritisationtranche),thenthewrittencreditderivativesontheindividualreferencenamesmaynotbeoffset.However,suchpurchasedcreditprotectionmayoffsetwrittencreditderivativesonapoolprovidedthatthecreditprotectionpurchasedthroughcreditderivativescoverstheentiretyofthesubsetofthepoolonwhichthecreditprotectionhasbeensold. [BCBSDec2017par47] Sincewrittencreditderivativesareincludedintheexposuremeasureattheireffectivenotionalamounts,andarealsosubjecttoadd-onamountsforPFE,theexposuremeasureforwrittencreditderivativesmaybeoverstated.InstitutionsmaythereforechoosetoexcludefromthenettingsetforthePFEcalculationtheportionofthewrittencreditderivativewhichisnotoffsetaccordingtoparagraph27andwhoseeffectivenotionalamountisincludedintheexposuremeasure.Whereeffectivebilateralnettingcontractsarenotinplace,thePFEadd-onmaybesettozeroinordertoavoidthedouble-countingdescribedinthisparagraph. [BCBSDec2017par49] (c)Securitiesfinancingtransaction(SFT)exposures SFTsFootnote18areincludedintheexposuremeasureaccordingtothetreatmentdescribedbelow.ThetreatmentrecognisesthatsecuredlendingandborrowingintheformofSFTsisanimportantsourceofleverage,andensuresconsistentinternationalimplementationbyprovidingacommonmeasurefordealingwiththemaindifferencesintheoperativeaccountingframeworks. [BCBSJan2014par32] (i)Generaltreatment(institutionactingasaprincipal) Whereaninstitutionactsasaprincipal,thesumoftheamountsinsubparagraphs(i)and(ii)belowaretobeincludedintheleverageratioexposuremeasure: GrossSFTassetsFootnote19recognisedforaccountingpurposes(i.e.,withnorecognitionofaccountingnetting),Footnote20adjustedasfollows: excludingfromtheexposuremeasurethevalueofanysecuritiesreceivedunderanSFT,wheretheinstitutionhasrecognisedthesecuritiesasanassetonitsbalancesheet;and cashpayablesandcashreceivablesinSFTswiththesamecounterpartymaybemeasurednetifallthefollowingcriteriaaremet: TransactionshavethesameexplicitfinalsettlementdateFootnote21; Therighttosetofftheamountowedtothecounterpartywiththeamountowedbythecounterpartyislegallyenforceablebothcurrentlyinthenormalcourseofbusinessandintheeventof:(i)default;(ii)insolvency;and(iii)bankruptcy;and Thecounterpartiesintendtosettlenet,settlesimultaneously,orthetransactionsaresubjecttoasettlementmechanismthatresultsinthefunctionalequivalentofnetsettlement,thatis,thecashflowsofthetransactionsareequivalent,ineffect,toasinglenetamountonthesettlementdate.Toachievesuchequivalence,alltransactionsmustbesettledthroughthesamesettlementmechanismandthesettlementarrangementsaresupportedbycashand/orintradaycreditfacilitiesintendedtoensurethatsettlementofalltransactionswilloccurbytheendofthebusinessdayandthelinkagestocollateralflowsdonotresultintheunwindingofnetcashsettlementFootnote22.Thefailureofanysinglesecuritiestransactioninthesettlementmechanismshoulddelaysettlementofonlythematchingcashlegorcreateanobligationtothesettlementmechanism,supportedbyanassociatedcreditfacility.Ifthereisafailureofthesecuritieslegofatransactioninsuchamechanismattheendofthewindowforsettlementinthesettlementmechanism,thenthistransactionanditsmatchingcashlegmustbesplitoutfromthenettingsetandtreatedgrossforpurposesoftotalexposures. AmeasureofCCRcalculatedasthecurrentexposurewithoutanadd-onforPFEFootnote23,calculatedasfollows: Whereaqualifyingmasternettingagreement(MNA)isinplace,thecurrentexposure(E*)isthegreaterofzeroandthetotalfairvalueofsecurities,goldandcashthattheinstitutionhaslent,soldsubjecttorepurchaseorprovidedascollateraltothecounterpartyforalltransactionsincludedinthequalifyingMNA(ΣEi),lessthetotalfairvalueofsecurities,goldandcashthattheinstitutionhasborrowed,purchasedsubjecttoresaleorreceivedascollateralfromthecounterpartyforthosetransactions(ΣCi).Thisisillustratedinthefollowingformula: E*=max{0,[ΣEi–ΣCi]} WherenoqualifyingMNAisinplace,thecurrentexposurefortransactionswithacounterpartymustbecalculatedonatransactionbytransactionbasis:thatis,eachtransactioniistreatedasitsownnettingset,asshowninthefollowingformula: Ei*=max{0,[Ei–Ci]} [BCBSJan2014par33] (ii)QualifyingmasternettingagreementFootnote24 TheeffectsofbilateralnettingagreementsforcoveringSFTswillberecognisedonacounterpartybycounterpartybasisiftheagreementsarelegallyenforceableineachrelevantjurisdictionupontheoccurrenceofaneventofdefaultandregardlessofwhetherthecounterpartyisinsolventorbankrupt.Inaddition,nettingagreementsmust: providethenon-defaultingpartywiththerighttoterminateandcloseoutinatimelymanneralltransactionsundertheagreementuponaneventofdefault,includingintheeventofinsolvencyorbankruptcyofthecounterparty; provideforthenettingofgainsandlossesontransactions(includingthevalueofanycollateral)terminatedandclosedoutunderitsothatasinglenetamountisowedbyonepartytotheother; allowforthepromptliquidationorsetoffofcollateralupontheeventofdefault;and be,togetherwiththerightsarisingfromprovisionsrequiredin(a)and(c)above,legallyenforceableineachrelevantjurisdictionupontheoccurrenceofaneventofdefaultregardlessofthecounterparty'sinsolvencyorbankruptcy. [BCBSJan2014Annexpar12] Nettingacrosspositionsheldinthebankingbookandtradingbookwillonlyberecognisedwhenthenettedtransactionsfulfilthefollowingconditions: alltransactionsaremarkedtomarketdaily;and thecollateralinstrumentsusedinthetransactionsarerecognisedaseligiblefinancialcollateralinthebankingbook. [BCBSJan2014Annexpar13] (iii)Saleaccountingtransactions LeveragemayremainwiththelenderofthesecurityinanSFTwhetherornotsaleaccountingisachievedundertheoperativeaccountingframework(e.g.,IFRS).Assuch,wheresaleaccountingisachievedforanSFTundertheinstitution'soperativeaccountingframework,theinstitutionmustreverseallsales-relatedaccountingentries,andthencalculateitsexposureasiftheSFThadbeentreatedasafinancingtransactionundertheoperativeaccountingframework(i.e.,theinstitutionmustincludethesumofamountsinsubparagraphs(i)and(ii)ofparagraph32forsuchanSFT)forthepurposesofdeterminingitsexposuremeasure.ForwardpurchaseagreementsorforwardsaleagreementstreatedasderivativecontractsthatarepartofSFTsthatqualifyforsaleaccountingtreatmentunderIFRSmaybeexcludedfromtheexposuremeasure. [BCBSJan2014Annexpar34] (iv)Institutionactingasanagentprovidinganindemnityforcreditrisk AninstitutionactingasagentinanSFTgenerallyprovidesanindemnityorguaranteetoonlyoneofthetwopartiesinvolved,andonlyforthedifferencebetweenthevalueofthesecurityorcashitscustomerhaslentandthevalueofcollateraltheborrowerhasprovided.Inthissituation,theinstitutionisexposedtothecounterpartyofitscustomerforthedifferenceinvaluesratherthantothefullexposuretotheunderlyingsecurityorcashofthetransaction(asisthecasewheretheinstitutionisoneoftheprincipalsinthetransaction).Wheretheinstitutiondoesnotown/controltheunderlyingcashorsecurityresource,thatresourcecannotbeleveragedbytheinstitution. [BCBSJan2014par35] WhereaninstitutionactingasagentinanSFTprovidesanindemnityorguaranteetoacustomerorcounterpartyforanydifferencebetweenthevalueofthesecurityorcashthecustomerhaslentandthevalueofcollateraltheborrowerhasprovided,thentheinstitutionwillberequiredtocalculateitsexposuremeasurebyapplyingonlysubparagraph(ii)ofparagraph32.Footnote25 [BCBSJan2014par36] AninstitutionactingasagentinanSFTandprovidinganindemnityorguaranteetoacustomerorcounterpartywillbeconsideredeligiblefortheexceptionaltreatmentsetoutinparagraph37onlyiftheinstitution'sexposuretothetransactionislimitedtotheguaranteeddifferencebetweenthevalueofthesecurityorcashitscustomerhaslentandthevalueofthecollateraltheborrowerhasprovided.Insituationswheretheinstitutionisfurthereconomicallyexposed(i.e.,beyondtheguaranteeforthedifference)totheunderlyingsecurityorcashinthetransaction,afurtherexposureequaltothefullamountofthesecurityorcashmustbeincludedintheexposuremeasure.Forexample,duetotheinstitutionmanagingcollateralreceivedintheinstitution'snameoronitsownaccountratherthanonthecustomer'sorborrower'saccount(e.g.,byon-lendingormanagingunsegregatedcollateral,cashorsecurities). [BCBSJan2014par37] (d)Offbalancesheetexposures Forthepurposeoftheleverageratio,offbalancesheet(OBS)itemswillbeconvertedintocreditexposureequivalentsbyapplyingcreditconversionfactors(CCFs)tothenotionalamountoftheexposure.TheamountafterapplyingtheapplicableCCFwillbeincludedintheexposuremeasure.Institutionsshouldrefertosection3.2oftheCARGuidelineforamoredetaileddescriptionofoffbalancesheetitems. [BCBSJan2014Annexpar14] Commitments,otherthansecuritisationliquidityfacilities,withanoriginalmaturityuptooneyearandcommitmentswithanoriginalmaturityoveroneyearwillreceiveaCCFof20%and50%,respectively.However,anycommitmentsthatareunconditionallycancellableatanytimebytheinstitutionwithoutpriornotice,orthateffectivelyprovideforautomaticcancellationduetodeteriorationinaborrower'screditworthiness,willreceivea10%CCF.Retailcommitmentsareconsideredunconditionallycancellableifthetermpermitstheinstitutiontocancelthemtothefullextentallowableunderconsumerprotectionandrelatedlegislation. [BCBSJan2014Annexpar15] Directcreditsubstitutes,e.g.,generalguaranteesofindebtedness(includingstandbylettersofcreditservingasfinancialguaranteesforloansandsecurities)andacceptances(includingendorsementswiththecharacterofacceptances)willreceiveaCCFof100%. [BCBSJan2014Annexpar16] Forwardassetpurchases,forwardforwarddepositsandpartlypaidsharesandsecurities,whichrepresentcommitmentswithcertaindrawdown,willreceiveaCCFof100%. [BCBSJan2014Annexpar17] Certaintransaction-relatedcontingentitems(e.g.,performancebonds,bidbonds,warrantiesandstandbylettersofcreditrelatedtoparticulartransactions)willreceiveaCCFof50%. [BCBSJan2014Annexpar18] Noteissuancefacilities(NIFs)andrevolvingunderwritingfacilities(RUFs)willreceiveaCCFof50%. [BCBSJan2014Annexpar19] Forshort-termself-liquidatingtradelettersofcreditarisingfromthemovementofgoods(e.g.,documentarycreditscollateralisedbytheunderlyingshipment),a20%CCFwillbeappliedtobothissuingandconfirminginstitutions. [BCBSJan2014Annexpar20] WherethereisanundertakingtoprovideacommitmentonanOBSitem,institutionsaretoapplythelowerofthetwoapplicableCCFs. [BCBSJan2014Annexpar21] Alloff-balancesheetsecuritisationexposures,exceptaneligibleservicercashadvancefacilityassetoutinparagraph43ofChapter7oftheCARGuideline,willreceiveaCCFof100%conversionfactor.Undrawnservicercashadvancesorfacilitiesthatareunconditionallycancellablewithoutpriornoticeareeligiblefora10%CCF. [BCBSJan2014Annexpar22] Footnotes Footnote1 ForinstitutionswithafiscalyearendingOctober31orDecember31,respectively. Returntofootnote1 Footnote2 Followingtheformat:[BCBSJan2014parxx],[BCBSFAQ#x,pagex]and[BCBSDec2017parxx] Returntofootnote2 Footnote3 Thisincludes"institutions"thataresubsidiariesofotherFederallyRegulatedFinancialInstitutions(FRFIs).Foreignbankbranchesarenotsubjecttothisguideline. Returntofootnote3 Footnote4 SupervisoryInformation(Banks)Regulations,SupervisoryInformation(TrustandLoanCompanies)Regulations,SupervisoryInformation(CooperativeCreditAssociations)Regulations Returntofootnote4 Footnote5 RefertotheGuidetoInterventionforFederalFinancialInstitutions. Returntofootnote5 Footnote6 ManagingDirector,ApprovalsandPrecedents,[email protected]. Returntofootnote6 Footnote7 Ifunderaninstitution'snationalaccountingstandards,thereisnoaccountingmeasureofexposureforcertainderivativeinstrumentsbecausetheyareheld(completely)off-balancesheet,theinstitutionmustusethesumofthepositivefairvaluesofthesederivativesasthereplacementcost.[BCBSJan2014par19footnote6] Returntofootnote7 Footnote8 Forpurposesofthisparagraph,theterms"clearingmember","tradeexposure","centralcounterparty"and"qualifyingcentralcounterparty"aredefinedasinsection4.1oftheCARGuideline.[BCBSDecember2017par41footnote19] Returntofootnote8 Footnote9 Forpurposesofparagraphs23and24,"tradeexposures"includesinitialmarginirrespectiveofwhetherornotitispostedinamannerthatmakesitremotefromtheinsolvencyoftheCCP.[BCBSJan2014par27footnote12] Returntofootnote9 Footnote10 Acentralcounterparty(CCP)isaclearinghousethatinterposesitselfbetweencounterpartiestocontractstradedinoneormorefinancialmarkets,becomingthebuyertoeverysellerandthesellertoeverybuyerandtherebyensuringthefutureperformanceofopencontracts.ACCPbecomescounterpartytotradeswithmarketparticipantsthroughnovation,anopensystem,oranotherlegallybindingarrangement. Returntofootnote10 Footnote11 WhereaninstitutionactsasaclearingmemberanddoesnotguaranteetheCCP'sperformancetotheclient,theinstitutionmayexcludefromtheexposuremeasuretheeffectivenotionalprincipalamountofcreditprotectionsoldthroughacreditderivativecontractthatitclearsonbehalfofaclearingmemberclient. Returntofootnote11 Footnote12 Amulti-levelclientstructureisoneinwhichinstitutionscancentrallyclearasindirectclients;thatis,whenclearingservicesareprovidedtotheinstitutionbyanotherinstitutionwhichisnotadirectclearingmember,butisitselfaclientofaclearingmemberoranotherclearingclient.Theterm"higherlevelclient"referstotheinstitutionthatprovidesclearingservices.[BCBSDec2017,par41,footnote20] Returntofootnote12 Footnote13 Thatis,upontheinsolvencyoftheclearingmember,thereisnolegalimpediment(otherthantheneedtoobtainacourtordertowhichtheclientisentitled)tothetransferofthecollateralbelongingtoclientsofadefaultingclearingmembertotheQCCP,tooneormoreothersurvivingclearingmembersortotheclientortheclient'snominee.[BCBSDec2017,par41,footnote21] Returntofootnote13 Footnote14 IfthereisclearprecedentfortransactionsbeingportedataQCCPandindustryintentforthispracticetocontinue,thenthesefactorsmustbeconsideredwhenassessingiftradesarehighlylikelytobeported.ThefactthatQCCPdocumentationdoesnotprohibitclienttradesfrombeingportedisnotsufficienttosaytheyarehighlylikelytobeported.[BCBSDec2017,par41,footnote22] Returntofootnote14 Footnote15 Theeffectivenotionalamountisobtainedbyadjustingthenotionalamounttoreflectthetrueexposureofcontractsthatareleveragedorotherwiseenhancedbythestructureofthetransaction.[BCBSJan2014par30footnote13] Returntofootnote15 Footnote16 Forexample,theapplicationofthesamematerialtermsconditionwouldresultinthefollowingtreatments: Inthecaseofsinglenamecreditderivatives,thecreditprotectionpurchasedthroughcreditderivativesisonareferenceobligationwhichranksparipassuwithorisjuniortotheunderlyingreferenceobligationofthewrittencreditderivative.Creditprotectionpurchasedthroughcreditderivativesthatreferencesasubordinatedpositionmayoffsetwrittencreditderivativesonamoreseniorpositionofthesamereferenceentityaslongasacrediteventontheseniorreferenceassetwouldresultinacrediteventonthesubordinatedreferenceasset; Fortranchedproducts,thecreditprotectionpurchasedthroughcreditderivativesmustbeonareferenceobligationwiththesamelevelofseniority.[BCBSDec2017par45,footnote25] Returntofootnote16 Footnote17 Specifically,thecreditqualityofthecounterpartymustnotbepositivelycorrelatedwiththevalueofthereferenceobligation(i.e.thecreditqualityofthecounterpartyfallswhenthevalueofthereferenceobligationfallsandthevalueofthepurchasedcreditderivativeincreases).Inmakingthisdetermination,theredoesnotneedtoexistalegalconnectionbetweenthecounterpartyandtheunderlyingreferenceentity. Returntofootnote17 Footnote18 SFTsaretransactionssuchasrepurchaseagreements,reverserepurchaseagreements,securitylendingandborrowing,andmarginlendingtransactions,wherethevalueofthetransactionsdependsonmarketvaluationsandthetransactionsareoftensubjecttomarginagreements.[BCBSJan2014par32footnote18] Returntofootnote18 Footnote19 ForSFTassetssubjecttonovationandclearedthroughQCCPs,"grossSFTassetsrecognisedforaccountingpurposes"arereplacedbythefinalcontractualexposure,giventhatpre-existingcontractshavebeenreplacedbynewlegalobligationsthroughthenovationprocess.[BCBSJan2014par33footnote19] Returntofootnote19 Footnote20 GrossSFTassetsrecognisedforaccountingpurposesmustnotrecogniseanyaccountingnettingofcashpayablesagainstcashreceivables(e.g.,ascurrentlypermittedunderIFRS).Thisregulatorytreatmenthasthebenefitofavoidinginconsistenciesfromnettingwhichmayariseacrossdifferentaccountingregimes.[BCBSJan2014par33footnote20] Returntofootnote20 Footnote21 OpenmaturitysecuredfinancingtransactionscanbetreatedasovernightmaturityprovidedtheinstitutioncandemonstratetoOSFI:i)thatitcancontractuallyandoperationallycollapseanopenmaturitytradeonthenextbusinessdaywithoutincurringlegalorreputationalrisk;andii)thatthetradesarepricedsimilarlytoovernighttrades. Returntofootnote21 Footnote22 Thislatterconditionensuresthatanyissuesarisingfromthesecuritieslegdonotinterferewiththecompletionofthenetsettlementofthecashreceivablesandpayables.ThiscriterionisnotintendedtoprecludeaDelivery-versus-Payment(DvP)settlementmechanismorothertypeofsettlementmechanism,providedthatthesettlementmechanismmeetsthefunctionalrequirementsassetoutinthisparagraph.Forexample,asettlementmechanismmaymeetthesefunctionalrequirementsifanyfailedtransactions(thatis,thesecuritiesthatfailedtotransferandtherelatedcashreceivableorpayable)canbere-enteredinthesettlementmechanismuntiltheyaresettled.[BCBSJan2014par33footnote22;BCBSFAQ#3,pages3-4] Returntofootnote22 Footnote23 ThedeterminationofPFEforSFTsunderparagraph66ofChapter5oftheCARGuideline(applicabletothoseexecutedunderMNAs)andfootnote16ofthatchapter(whichrecapitulatesparagraph29andisapplicabletothosetransactionsnotexecutedunderMNAs)requirestheinstitutiontoapplyhaircutstothevalueofsecuritiesandforforeignexchangerisk.SincecounterpartyriskforSFTsforleverageratiopurposesisdeterminedsolelybythecurrentexposureportionoftheformulasinthoseparagraphs,nohaircutsareneededinthecalculation. Returntofootnote23 Footnote24 Theprovisionsrelatedtoqualifyingmasternettingagreements(MNAs)forSFTsareintendedforthecalculationofthecounterpartyadd-onoftheexposuremeasureofSFTsassetoutinparagraph32(ii)only.[BCBSJan2014Annexpar12footnote33] Returntofootnote24 Footnote25 Where,inadditiontotheconditionsinparagraphs36to38,aninstitutionactingasanagentinanSFTdoesnotprovideanindemnityorguaranteetoanyoftheinvolvedparties,theinstitutionisnotexposedtotheSFTandthereforeneednotrecognisethoseSFTsinitsexposuremeasure.[BCBSJan2014par36,footnote24] Returntofootnote25 ModifiedDate: 2018-10-30 Secondarymenu RegulationandGuidance ActsandRegulations Guidance TableofGuidelines TableofAdvisories ApprovalsandPrecedents ApplicationandApprovalGuides RegulatoryandLegislativeAdvisories LegislativeRulings CapitalRulings NameRequest RiskAssessmentandIntervention SupervisoryPractices GuidetoIntervention TrustAgreements RegulatoryData FilingCorporateReturns FilingFinancialReturns ViewingFinancialData Anti-moneyLaunderingandCompliance Anti-moneyLaundering Anti-terrorismFinancing Sanctions Messages IndustryNotices WebTools WhoWeRegulate