23.In general, for the purpose of the leverage ratio exposure measure, exposures for derivatives are calculated in accordance with the Central Bank’s Standard for Counterparty Credit Risk Capital through the two components of replacement cost (RC) and PFE, as follows:

Exposure measure = (RC + PFE) × 1.4
 

Where, RC is Replacement Cost, and PFE is Potential Future Exposure.

24.Where a valid bilateral netting contract is in place, the exposure measure is calculated at the netting set level. However, contracts containing walkaway clauses are not eligible for netting for the purpose of calculating the leverage ratio exposure measure pursuant to this Standards.

25.The PFE for derivative exposures must be calculated in accordance with the Central Bank’s Standard for Counterparty Credit Risk Capital. Mathematically:

PFE = (PFE multiplier) × (AddOn_agg)
 

where PFE multiplier is as specified in the Standards, and

AddOn_agg is the aggregate Add On for derivatives exposure as specified in the Standards.

However, for the purposes of this Standards, the PFE multiplier from the Standards is fixed at a value of one. Therefore, for the purposes of calculating derivatives exposure for the leverage ratio, PFE is simply equal to the aggregate Add On.

26.Derivative transactions in which a bank sells protection using a written credit derivative are included in this exposure measure as derivatives, but may also create an additional credit exposure that is included as exposure for purposes of the leverage ratio, as set out below in this Standards.

27.As a general principle of the leverage ratio framework, collateral received may not be netted against derivative exposures. Hence, when calculating the exposure amount as set forth above, a bank must not reduce the leverage ratio exposure measure amount by any collateral received from the counterparty. However, the maturity factor in the PFE add-on calculation can recognize the PFE-reducing effect from the regular exchange of VM.

28.Similarly, with regard to collateral provided, banks must gross up their leverage ratio exposure measure by the amount of any derivatives collateral provided where the provision of that collateral has reduced the value of their balance sheet assets under their operative accounting framework.

29.For purposes of this standards, RC of a transaction or netting set is measured as follows:

RC = max(V - CVMr, +CVMp, 0)

where:

V is the market value of the individual derivative transaction or of the derivative transactions in a netting set;

CVMr is the cash VM received that meets the conditions set out below and for which the amount has not already reduced the market value of the derivative transaction V under the bank’s operative accounting standards; and

CVMp is the cash VM provided by the bank and that meets the same conditions.