Leverage Ratio Framework

Banks should be particularly cautious to transactions and structures that have the result of inadequately capturing banks' sources of Leverage. Examples of concerns that might arise in such Leverage ratio exposure measure minimizing transactions and structures include the following: (i) Securities financing transactions where exposure to the counterparty increases as the counterparty's credit quality decreases, or securities financing transactions in which the credit quality of the counterparty is positively correlated with the value of the securities received in the transaction (i.e. the credit quality of the counterparty falls when the value of the securities falls); (ii) Banks that normally act as principal but adopt an agency model to transact in derivatives and SFTs in order to benefit from the more favorable treatment permitted for agency transactions under the Leverage ratio framework; (iii) Collateral swap trades structured to mitigate inclusion in the leverage ratio exposure measure; or use of structures to move assets off the balance sheet. The above list of examples is by no means exhaustive. 6.6 SAMA reserves should be included in the Leverage exposure measure. SAMA may temporarily exempt central bank reserves from the Leverage ratio exposure measure in exceptional cases and when it deems necessary. 2 As per paragraph 18.24 in the Minimum Capital Requirements for Credit Risk issued by SAMA 7. Treatment of Exposure Measures Items 7.1 On-Balance Sheet Exposures 7.1.1 All balance sheet assets including on-balance sheet derivatives collateral and collateral for secured financing transactions (SFTs) should be included in the Leverage ratio exposure measure except for the following: (i) On-balance sheet derivative and SFT assets that are covered in 7.2 Derivatives and 7.3 Security Financing Transactions below. (ii) fiduciary assets: Where a bank according to its operative accounting framework recognizes fiduciary assets on the balance sheet, these assets can be excluded from the Leverage ratio exposure measure provided that the assets meet the IFRS 9 criteria for de-recognition and, where applicable, IFRS 10 for deconsolidation. 7.1.2 On-balance sheet non-derivative assets are included in the Leverage ratio exposure measure at their accounting values less deductions for associated specific provisions. 7.1.3 General provisions or general loan loss reserves that reduce the regulatory capital should be deducted from the Leverage ratio exposure measure. For the purposes of the leverage ratio exposure measure, the definition of general provisions/general loan-loss reserves applies to all banks regardless of whether they use the standardized approach or the IRB approach for credit risk for their risk based capital calculations.