Leverage ratio treatment of client cleared derivatives

The publication Leverage ratio treatment of client cleared derivatives sets out a targeted revision to align the leverage ratio measurement of client cleared derivatives with the measurement determined per the standardised approach to measuring counterparty credit risk exposures (SA-CCR) as used for risk-based capital requirements. This treatment will permit both cash and non-cash forms of segregated initial margin and cash and non-cash variation margin received from a client to offset the replacement cost and potential future exposure for client cleared derivatives only.

The Basel Committee revised this treatment following its evaluation of the impact of the leverage ratio on banks' provision of client clearing services and of quantitative and qualitative information on banks' exposures to client cleared derivatives. The Committee also took into consideration a joint evaluation - alongside the Financial Stability Board, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions - of the effects of G20 financial regulatory reforms on the incentives to centrally clear over-the-counter derivatives.

The Basel Committee is of the view that this limited revision balances the robustness of the leverage ratio as a non-risk based safeguard against unsustainable sources of leverage with the policy objective set by the G20 Leaders to promote central clearing of standardised derivative contracts as part of mitigating systemic risk and making derivatives markets safer.

The revised treatment of client cleared derivatives is applicable to the version of the leverage ratio standard that serves as the Pillar 1 minimum capital requirement as of 1 January 2022.