7.2 Derivative Exposures

Treatment of related collateral (i) Collateral received a. Collateral received in connection with derivative contracts has two countervailing effects on Leverage: ■ Reduces counterparty exposure ■ Increases the economic resources at the disposal of the bank, as the bank can use the collateral to Leverage itself. b. Collateral received in connection with derivative contracts does not necessarily reduce the Leverage inherent in a bank's derivative position, which is generally the case if the settlement exposure arising from the underlying derivative contract is not reduced. c. Collateral received should not be netted against derivative exposures whether or not netting is permitted under the bank's operative accounting or risk-based framework. By applying 7.2.2 (derivative calculation) above, banks must not reduce the Leverage ratio exposure measure amount by any collateral received from the counterparty. This implies that replacement cost cannot be reduced by collateral received and the multiplier referenced in paragraph 7.2.2 is fixed at one for the purpose of the PFE calculation. However, the maturity factor in the PFE add-on calculation can recognize the PFE-reducing effect from the regular exchange of variation margin as specified above in paragraph 7.2.2. (ii) 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. 7.2.4 Treatment of cash variation margin: (i) Treatment of derivative exposures for the purpose of the Leverage ratio exposure measure, the cash portion of variation margin exchanged between counterparties may be viewed as a form of pre-settlement payment if the following conditions are met: a. Trades not cleared through a qualifying central counterparty (QCCP) 5 the cash received by the recipient counterparty is not segregated. Cash variation margin would satisfy the non-segregation criterion if the recipient counterparty has no restrictions by law, regulation, or any agreement with the counterparty on the ability to use the cash received (i.e. the cash variation margin received used as its own cash). b. Variation margin is calculated and exchanged on at least a daily basis based on mark-to-market valuation of derivative positions. To meet this criterion, derivative positions must be valued daily and cash variation margin must be transferred at least daily to the counterparty or to the counterparty's account, as appropriate. Cash variation margin exchanged on the morning of the subsequent trading day based on the previous, end-of-day market values would meet this criterion. c. The variation margin is received in a currency specified in the derivative contract, governing master netting agreement (MNA), credit support annex (CSA) to the qualifying MNA or as defined by any netting agreement with a CCP. d. Variation margin exchanged is the full amount that would be necessary to extinguish the mark to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty. If a margin dispute arises, the amount of non-disputed variation margin that has been exchanged can be recognized. e. Derivative transactions and variation margins are covered by a single MNA between the legal entities that are the counterparties in the derivative transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty. The MNA must be legally enforceable and effective (i.e. it satisfies the conditions in point (c) in subparagraph (v) and subparagraph (vi) in paragraph