Basel Committee finalises revisions to leverage ratio treatment of client cleared derivatives and disclosure requirements to address window-dressing

The Basel Committee on Banking Supervision today released a revised treatment of client cleared derivatives for purposes of the leverage ratio. The Basel Committee also issued a revision to the leverage ratio disclosure requirements with the aim of reducing excessive volatility in banks' exposures around key reference dates.

The publication Leverage ratio treatment of client cleared derivatives sets out a targeted revision of the leverage ratio measurement of client cleared derivatives to align it with the standardised approach to measuring counterparty credit risk exposures (SA-CCR). This treatment permits 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.

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.

The publication Revisions to leverage ratio disclosure requirements sets out additional requirements for banks to disclose their leverage ratios based on quarter-end and on daily average values of securities financing transactions. A comparison of the two sets of values will allow market participants to better assess banks' actual leverage throughout the reporting period.

The Basel Committee has finalised this disclosure requirement to address concerns expressed in a newsletter published last year regarding potential regulatory arbitrage by banks in the form of "window-dressing", whereby temporary reductions of transaction volumes around reference dates result in the reporting and public disclosure of artificially elevated leverage ratios. The Basel Committee will continue to carefully monitor potential window-dressing behaviour on the part of banks.

Both revisions will be applicable to the version of the leverage ratio standard that will come into effect on 1 January 2022.