43.For a bank acting as principal to an SFT, two components of exposure must be calculated, summed, and included in the leverage ratio exposure measure: adjusted gross SFT assets as described in the following paragraph, and a measure of CCR, as described below.

44.Gross SFT assets as recognized for accounting purposes (i.e. with no recognition of accounting netting) should be reduced by the value of any securities received under an SFT where the bank has recognized the securities as an asset on its balance sheet. In addition, cash payables and cash receivables in SFTs with the same counterparty may be measured net if all the following criteria are met:

• •The transactions have the same explicit final settlement date (transactions with no explicit end date but that can be unwound at any time by either party to the transaction are not eligible);
• •The right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of the counterparty’s default, insolvency, or bankruptcy; and
• •The counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement – that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date. To achieve such equivalence, both transactions must be settled through the same settlement system and the settlement arrangements must be supported by cash and/or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and that any issues arising from the securities legs of the SFTs do not interfere with the completion of the net settlement of the cash receivables and payables. If there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross.

45.A bank must add a measure of CCR for SFTs to the adjusted gross SFT assets as calculated per the previous paragraph. The CCR measure is calculated as current exposure without an add-on for PFE, with current exposure calculated as follows:

• •Where a qualifying MNA is in place, the current exposure (E*) is the greater of zero and the total fair value of securities and cash lent to a counterparty for all transactions included in the qualifying MNA (∑E_i), less the total fair value of cash and securities received from the counterparty for those transactions (∑C_i). This is illustrated in the following formula:

  E* = max {0, [∑Ei – ∑Ci]}

           Where, E* = current exposure,

           ∑Ei = total fair value of securities and cash lent to counterparty “i” and

           ∑Ci = total fair value of securities and cash received from “i”

• •Where no qualifying MNA is in place, the current exposure for transactions with a counterparty must be calculated on a transaction-by-transaction basis – that is, each transaction is treated as its own netting set, as shown in the following formula:

  E* = max {0, [E – C]}

           where E* = current exposure,

           E = total fair value of securities and cash lent in the transaction, and C = total fair value of securities and cash received in the transaction.

E* may be set to zero if E is the cash lent to a counterparty, the transaction is treated as its own netting set, and the associated cash receivable is not eligible for the netting treatment in paragraph 45. For the purposes of this subparagraph, the term “counterparty” includes not only the counterparty of the bilateral repo transactions but also triparty repo agents that receive collateral in deposit and manage the collateral in the case of triparty repo transactions. Therefore, securities deposited at triparty repo agents are included in “total value of securities and cash lent to a counterparty”

(E) up to the amount effectively lent to the counterparty in a repo transaction. However, excess collateral that has been deposited at triparty agents but that has not been lent out may be excluded.

46.Where sale accounting is achieved for an SFT under the bank’s operative accounting framework, the bank must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction under the operative accounting framework (i.e. the bank must include the sum of amounts in paragraphs 45 and 46 for such an SFT) for the purpose of determining its leverage ratio exposure measure.

47.If a bank acting as agent in an SFT provides an indemnity or guarantee to only one of the two parties involved, and only for the difference between the value of the security or cash its customer has lent and the value of collateral the borrower has provided, the bank is exposed to the counterparty of its customer for the difference in values rather than to the full exposure to the underlying security or cash of the transaction.

48.Where a bank acting as agent in an SFT provides an indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided and the bank does not own or control the underlying cash or security resource, then the bank will be required to include a measure of CCR in its leverage ratio exposure measure by applying paragraph 46.

49.A bank acting as agent in an SFT and providing an indemnity or guarantee to a customer or counterparty will be considered eligible for the exceptional treatment set out in the paragraph above only if the bank’s exposure to the transaction is limited to the guaranteed difference between the value of the security or cash its customer has lent and the value of the collateral the borrower has provided. In situations where the bank is further economically exposed (i.e. beyond the guarantee for the difference) to the underlying security or cash in the transaction, a further exposure equal to the full amount of the security or cash must be included in the leverage ratio exposure measure.

50.Where a bank acting as agent provides an indemnity or guarantee to both parties involved in an SFT (i.e. securities lender and securities borrower), the bank will be required to calculate its leverage ratio exposure measure separately for each party involved in the transaction.

51.The effects of bilateral netting agreements for covering SFTs will be recognized on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:

• •provide the non-defaulting party with the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
• •provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
• •allow for the prompt liquidation or setoff of collateral upon the event of default; and
• •be legally enforceable in each relevant jurisdiction upon the occurrence of an event of default regardless of the counterparty’s insolvency or bankruptcy.

52.Netting across positions held in the banking book and trading book will only be recognized when all netted transactions are marked to market daily, and the collateral instruments used in the transactions are recognized as eligible financial collateral in the banking book.