Leverage Ratio (CRR)

1.

Institutions shall calculate their leverage ratio in accordance with the methodology set out in paragraphs 2, 3 and 4.

2.

The leverage ratio shall be calculated as an institution's capital measure divided by that institution's total exposure measure and shall be expressed as a percentage.

3.

For the purposes of paragraph 2, the capital measure shall be tier 1 capital (leverage).

4.

For the purposes of paragraph 2, the total exposure measure shall be the sum of the exposure values of:

1. (a) assets, excluding derivative contracts listed in Annex II of the CRR, credit derivatives and the add-ons for counterparty credit risk for securities financing transactions referred to in Article 429e of this Chapter, calculated in accordance with Article 429b(1) of this Chapter;
2. (b) derivative contracts listed in Annex II of the CRR and credit derivatives, including those contracts and credit derivatives that are off-balance-sheet, calculated in accordance with Articles 429c and 429d of this Chapter;
3. (c) add-ons for counterparty credit risk of securities financing transactions, including those that are off-balance- sheet, calculated in accordance with Article 429e of this Chapter;
4. (d) off-balance-sheet items, excluding derivative contracts listed in Annex II of the CRR, credit derivatives, securities financing transactions and positions referred to in Articles 429d and 429g of this Chapter, calculated in accordance with Article 429f of this Chapter; and
5. (e) regular-way purchases or sales awaiting settlement, calculated in accordance with Article 429g of this Chapter.

Institutions shall treat long settlement transactions in accordance with points (a) to (d) of the first subparagraph, as applicable.

Institutions may reduce the exposure values referred to in points (a) and (d) of the first subparagraph by the corresponding amount of general credit risk adjustments to on- and off-balance-sheet items, respectively, subject to a floor of 0 where the credit risk adjustments have reduced the tier 1 capital (leverage).

5.

Point (d) of paragraph 4 applies subject to the following provisions:

1. (a) an off-balance-sheet item in accordance with point (d) of paragraph 4 that is treated as a derivative in accordance with the applicable accounting framework shall be subject to the treatment set out in point (b) of that paragraph;
2. (b) where a client of an institution acting as a clearing member enters directly into a derivative transaction with a central counterparty and the institution guarantees the performance of its client's trade exposures to the central counterparty arising from that transaction, the institution shall calculate its exposure resulting from the guarantee in accordance with point (b) of paragraph 4, as if that institution had entered directly into the transaction with the client, including with regard to the receipt or provision of cash variation margin.

The treatment set out in point (b) of the first subparagraph shall also apply to an institution acting as a higher-level client that guarantees the performance of its client's trade exposures.

For the purposes of point (b) of the first subparagraph and of the second subparagraph of this paragraph, institutions may consider an affiliated entity as a client only where that entity is outside the regulatory scope of consolidation at the level at which the requirement set out in point (d) of Article 92(3) of the CRR is applied.

6.

For the purposes of point (e) of paragraph 4 of this Article and Article 429g of this Chapter, ‘regular-way purchase or sale’ means a purchase or a sale of a security under contracts for which the terms require delivery of the security within the period established generally by law or convention in the marketplace concerned.

7.

Unless otherwise expressly provided for in this Part, institutions shall calculate the total exposure measure in accordance with the following principles:

1. (a) physical or financial collateral, guarantees or credit risk mitigation purchased shall not be used to reduce the total exposure measure;
2. (b) assets shall not be netted with liabilities.

[Note: This rule corresponds to Article 429 of the CRR as it applied immediately before revocation by the Treasury.]

A1

By way of derogation from Article 429(4) of this Chapter, a central bank claim of a firm shall be netted off against a liability, provided that:

1. (a) the central bank claim and liability are denominated in the same currency; and
2. (b) where applicable, the date of contractual maturity of the central bank claim is the same as, or is before, the date of contractual maturity of the liability.

For the purposes of point (b) of the first subparagraph, and in relation to liabilities which are not deposits, institutions shall take into account existing options in determining the residual maturity of the liability in a prudent manner. Institutions shall do so on the assumption that the counterparty will redeem call options at the earliest possible date.

For options exercisable at the discretion of the institution, the institution shall take into account reputational factors that may limit an institution's ability not to exercise the option, in particular market expectations that institutions should redeem certain liabilities before their maturity.

1.

By way of derogation from Article 429(4) of this Chapter, an institution may exclude any of the following exposures from its total exposure measure:

1. (a) the amounts deducted from Common Equity Tier 1 items in accordance with point (d) of Article 36(1) of Chapter 3 of the Own Funds and Eligible Liabilities (CRR) Part;
2. (b) any items, other than liabilities, deducted in the calculation of the capital measure referred to in Article 429(3) of this Chapter;
3. (c) exposures that are assigned a risk weight of 0% in accordance with Article 113(6) of the CRR provided that the PRA has also given permission to the institution under this rule.
4. The PRA may grant that permission only where all the conditions set out in points (a) to (e) of Article 113(6) of the CRR are met and where the PRA has given the approval laid down in Article 113(6) of the CRR.
5. [Note: This is a permission created under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies.]
6. (d) [Note: Provision left blank]
7. (e) [Note: Provision left blank]
8. (f) [Note: Provision left blank]
9. (g) where the institution is a clearing member of a qualifying central counterparty, the trade exposures of that institution, provided that they are cleared with that qualifying central counterparty and meet the conditions set out in point (c) of Article 306(1) of Chapter 3 of the Counterparty Credit Risk (CRR) Part;
10. (h) where the institution is a higher-level client within a multi-level client structure, the trade exposures to the clearing member or to an entity that serves as a higher-level client to that institution, provided that the conditions set out in Article 305(2) of Chapter 3 of the Counterparty Credit Risk (CRR) Part are met and provided that the institution is not obligated to reimburse its client for any losses suffered in the event of default of either the clearing member or the qualifying central counterparty;
11. (i) fiduciary assets which meet all the following conditions:
1. (i) they are recognised on the institution's balance sheet;
2. (ii) they meet the criteria for non-recognition set out in International Financial Reporting Standard (IFRS) 9, as applied under UK-adopted international accounting standards;
3. (iii) they meet the criteria for non-consolidation set out in IFRS 10, as applied under UK-adopted international accounting standards, where applicable;
12. (j) exposures that meet all the following conditions:
1. (i) they are exposures to a public sector entity;
2. (ii) they are treated in accordance with Article 116(4) of the CRR;
3. (iii) they arise from deposits that the institution is legally obliged to transfer to the public sector entity referred to in point (i) for the purpose of funding general interest investments;
13. provided that the PRA has also granted permission under this rule.
14. [Note: This is a permission created under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies.]
15. (k) the excess collateral deposited at tri-party agents that has not been lent out;
16. (l) where under the applicable accounting framework an institution recognises the variation margin paid in cash to its counterparty as a receivable asset, the receivable asset, provided that the conditions set out in points (a) to (e) of Article 429c(3) of this Chapter are met;
17. (m) the securitised exposures from traditional securitisations that meet the conditions for significant risk transfer set out in Article 244(2) of the CRR;
18. (n) [Note: Provision left blank]
19. (o) [Note: Provision left blank]
20. (p) [Note: Provision left blank]
21. (q) loans made by the firm pursuant to:
1. (i) the Bounce Back Loan scheme announced by Her Majesty’s Government on 27 April 2020; or
2. (ii) schemes supporting lending to small and medium-sized businesses which are located in an EEA State in the course of the Coronavirus pandemic, provided that such loans were created before 1 January 2022, do not exceed €60,000 per loan and are subject to a 100% guarantee provided by an EEA State or central bank of an EEA State or the European Central Bank.

For the purposes of point (m) of the first subparagraph, institutions shall include any retained exposure in the total exposure measure.

2.

[Note: Provision left blank]

3.

[Note: Provision left blank]

4.

Institutions shall not exclude the trade exposures referred to in points (g) and (h) of paragraph 1 of this Article, where the condition set out in the third subparagraph of Article 429(5) of this Chapter is not met.

5.

[Note: Provision left blank]

6.

[Note: Provision left blank]

7.

[Note: Provision left blank]

1.

Institutions shall calculate the exposure value of assets, excluding derivative contracts listed in Annex II of the CRR, credit derivatives and the add-ons for counterparty credit risk for securities financing transactions referred to in Article 429e of this Chapter, in accordance with the following principles:

1. (a) the exposure values of assets means an exposure value as referred to in the first sentence of Article 111(1) of the CRR;
2. (b) securities financing transactions shall not be netted.

2.

Subject to the remaining paragraphs of this Article, a cash pooling arrangement offered by an institution does not violate the condition set out in point (b) of Article 429(7) of this Chapter only where the arrangement meets both of the following conditions:

1. (a) the institution offering the cash pooling arrangement transfers the credit and debit balances of several individual accounts of entities of a group included in the arrangement (‘original accounts’) into a separate, single account and thereby sets the balances of the original accounts to zero;
2. (b) the institution carries out the actions referred to in point (a) of this subparagraph on a daily basis.

For the purposes of this paragraph and paragraph 3, cash pooling arrangement means an arrangement whereby the credit or debit balances of several individual accounts are combined for the purposes of cash or liquidity management.

3.

By way of derogation from paragraph 2 of this Article, a cash pooling arrangement that does not meet the condition set out in point (b) of that paragraph, but meets the condition set out in point (a) of that paragraph, does not violate the condition set out in point (b) of Article 429(7) of this Chapter, provided that the arrangement meets all the following conditions:

1. (a) the institution has a legally enforceable right to set off the balances of the original accounts through the transfer into a single account at any point in time;
2. (b) there are no maturity mismatches between the balances of the original accounts;
3. (c) the institution charges or pays interest based on the combined balance of the original accounts;
4. (d) the frequency by which the balances of all original accounts are transferred is adequate for the purpose of including only the combined balance of the cash pooling arrangement in the total exposure measure.

4.

By way of derogation from point (b) of paragraph 1, institutions may calculate the exposure value of cash receivable and cash payable under securities financing transactions with the same counterparty on a net basis only where all the following conditions are met:

1. (a) the transactions have the same explicit final settlement date;
2. (b) the right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of default, insolvency and bankruptcy;
3. (c) the counterparties intend to settle on a net basis or to settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement.

5.

For the purposes of point (c) of paragraph 4, institutions may consider that a settlement mechanism results in the functional equivalent of net settlement only where, on the settlement date, the net result of the cash flows of the transactions under that mechanism is equal to the single net amount under net settlement and all the following conditions are met:

1. (a) the transactions are settled through the same settlement system or settlement systems using a common settlement infrastructure;
2. (b) the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that the settlement of the transactions will occur by the end of the business day;
3. (c) any issues arising from the securities legs of the securities financing transactions do not interfere with the completion of the net settlement of the cash receivables and payables.

The condition set out in point (c) of the first subparagraph is met only where the failure of any securities financing transaction in the settlement mechanism may delay settlement of only the matching cash leg or may create an obligation to the settlement mechanism, supported by an associated credit facility.

Where there is a failure of the securities leg of a securities financing transaction in the settlement mechanism at the end of the window for settlement in the settlement mechanism, institutions shall split out this transaction and its matching cash leg from the netting set and treat them on a gross basis.

1.

Institutions shall calculate the exposure value of derivative contracts listed in Annex II of the CRR and of credit derivatives, including those that are off-balance-sheet, in accordance with the standardised approach for counterparty credit risk.

When calculating the exposure value, institutions may take into account the effects of contracts for novation and other netting agreements in accordance with Article 295 of the CRR. Institutions shall not take into account cross-product netting, but may net within the product category as referred to in point (25)(c) of Article 272 of the CRR and credit derivatives where they are subject to a contractual cross-product netting agreement as referred to in point (c) of Article 295 of the CRR.

Institutions shall include in the total exposure measure sold options even where their exposure value can be set to zero in accordance with the treatment laid down in Article 274(5) of Chapter 3 of the Counterparty Credit Risk (CRR) Part.

2.

Where the provision of collateral related to derivative contracts reduces the amount of assets under the applicable accounting framework, institutions shall reverse that reduction

3.

For the purposes of paragraph 1 of this Article, institutions calculating the replacement cost of derivative contracts in accordance with Article 275 of Chapter 3 of the Counterparty Credit Risk (CRR) Part may recognise only collateral received in cash from their counterparties as the variation margin referred to in that Article 275, where the applicable accounting framework has not already recognised the variation margin as a reduction of the exposure value and where all the following conditions are met:

1. (a) for trades not cleared through a qualifying central counterparty, the cash received by the recipient counterparty is not segregated;
2. (b) the variation margin is calculated and exchanged at least daily based on a mark-to-market valuation of derivatives positions;
3. (c) the variation margin received is in a currency specified in the derivative contract, governing master netting agreement, credit support annex to the qualifying master netting agreement or as defined by any netting agreement with a qualifying central counterparty;
4. (d) the variation margin received is the full amount that would be necessary to extinguish the mark-to-market exposure of the derivative contract subject to the threshold and minimum transfer amounts that are applicable to the counterparty;
5. (e) the derivative contract and the variation margin between the institution and the counterparty to that contract are covered by a single netting agreement that the institution may treat as risk-reducing in accordance with Article 295 of the CRR.

Where an institution provides cash collateral to a counterparty and that collateral meets the conditions set out in points (a) to (e) of the first subparagraph, the institution shall consider that collateral as the variation margin posted with the counterparty and shall include it in the calculation of the replacement cost.

For the purposes of point (b) of the first subparagraph, an institution shall be considered to have met the condition set out therein where the variation margin is exchanged on the morning of the trading day following the trading day on which the derivative contract was stipulated, provided that the exchange is based on the value of the contract at the end of the trading day on which the contract was stipulated.

For the purposes of point (d) of the first subparagraph, where a margin dispute arises, institutions may recognise the amount of non-disputed collateral that has been exchanged.

4.

For the purposes of paragraph 1 of this Article, institutions shall not include collateral received in the calculation of the net independent collateral amount, except in the case of derivative contracts with clients where those contracts are cleared by a qualifying central counterparty.

5.

For the purposes of paragraph 1 of this Article, institutions shall set the value of the multiplier used in the calculation of the potential future exposure in accordance with Article 278(1) of Chapter 3 of the Counterparty Credit Risk (CRR) Part to one, except in the case of derivative contracts with clients where those contracts are cleared by a qualifying central counterparty.

6.

By way of derogation from paragraph 1 of this Article, institutions may use the simplified standardised approach for counterparty credit risk or the original exposure method to determine the exposure value of derivative contracts listed in points 1 and 2 of Annex II of the CRR, but only where they also use that method for determining the exposure value of those contracts for the purpose of meeting the own funds requirements set out in Article 92 of the CRR.

Where institutions apply one of the methods referred to in the first subparagraph, they shall not reduce the total exposure measure by the amount of margin they have received.

[Note: This rule corresponds to paragraphs (1) to (4) and (8) of Article 429a of the CRR as it applied immediately before revocation by the Treasury.]

1.

For the purposes of this Article, ‘written credit derivative’ means any financial instrument through which an institution effectively provides credit protection including credit default swaps, total return swaps and options where the institution has the obligation to provide credit protection under conditions specified in the options contract.

2.

In addition to the calculation laid down in Article 429c of this Chapter, institutions shall include in the calculation of the exposure value of written credit derivatives the effective notional amounts referenced in the written credit derivatives reduced by any negative fair value changes that have been incorporated in tier 1 capital (leverage) with respect to those written credit derivatives.

Institutions shall calculate the effective notional amount of written credit derivatives by adjusting the notional amount of those derivatives to reflect the true exposure of the contracts that are leveraged or otherwise enhanced by the structure of the transaction.

3.

Institutions may fully or partly reduce the exposure value calculated in accordance with paragraph 2 by the effective notional amount of purchased credit derivatives, provided that all the following conditions are met:

1. (a) the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the written credit derivative;
2. (b) the purchased credit derivative is otherwise subject to the same or more conservative material terms as those in the corresponding written credit derivative;
3. (c) the purchased credit derivative is not purchased from a counterparty that would expose the institution to Specific Wrong-Way risk, as defined in point (b) of Article 291(1) of the CRR;
4. (d) where the effective notional amount of the written credit derivative is reduced by any negative change in fair value incorporated in the institution's tier 1 capital (leverage), the effective notional amount of the purchased credit derivative is reduced by any positive fair value change that has been incorporated in tier 1 capital (leverage);
5. (e) the purchased credit derivative is not included in a transaction that has been cleared by the institution on behalf of a client or that has been cleared by the institution in its role as a higher-level client in a multi-level client structure and for which the effective notional amount referenced by the corresponding written credit derivative is excluded from the total exposure measure in accordance with point (g) or (h) of the first subparagraph of Article 429a(1) of this Chapter, as applicable.

For the purpose of calculating the potential future exposure in accordance with Article 429c(1), institutions may exclude from the netting set the portion of a written credit derivative which is not offset in accordance with the first subparagraph of this paragraph and for which the effective notional amount is included in the total exposure measure.

4.

For the purposes of point (b) of paragraph 3:

1. (a) if an institution provides written protection via some type of credit derivative, the institution may only recognise offsetting from another purchased credit derivative to the extent that the purchased protection is certain to deliver a payment in all potential future states;
2. (b) ‘material term’ means any characteristic of the credit derivative that is relevant to the valuation thereof, including the level of subordination, the optionality, the credit events, the underlying reference entity or pool of entities, and the underlying reference obligation or pool of obligations, with the exception of the notional amount and the residual maturity of the credit derivative; and
3. (c) two reference names shall be the same only where they refer to the same legal entity.

5.

By way of derogation from point (b) of paragraph 3, institutions may use purchased credit derivatives on a pool of reference names to offset written credit derivatives on individual reference names within that pool where the pool of reference entities and the level of subordination in both transactions are the same.

6.

Institutions shall not reduce the effective notional amount of written credit derivatives where they buy credit protection through a total return swap and record the net payments received as net income, but do not record any offsetting deterioration in the value of the written credit derivative in tier 1 capital (leverage).

7.

In the case of purchased credit derivatives on a pool of reference obligations:

1. (a) institutions may reduce the effective notional amount of written credit derivatives on individual reference obligations by the effective notional amount of purchased credit derivatives in accordance with paragraph 3 only where the protection purchased is economically equivalent to buying protection separately on each of the individual obligations in the pool;
2. (b) if an institution purchases credit protection on a pool of reference names through credit derivatives, but the credit protection purchased does not cover the entire pool, then the written credit derivatives on the individual reference names may not be offset;
3. (c) by way of derogation from (a) and (b), purchased credit protection may offset written credit derivatives on a pool where the credit protection purchased through credit derivatives covers the entirety of the subset of the pool on which the credit protection has been sold.

[Note: This rule corresponds to paragraphs (5) to (7) of Article 429a of the CRR as it applied immediately before revocation by the Treasury.]

1.

In addition to the calculation of the exposure value of securities financing transactions, including those that are off-balance-sheet in accordance with Article 429b(1) of this Chapter, institutions shall include in the total exposure measure an add-on for counterparty credit risk calculated in accordance with paragraph 2 or 3 of this Article, as applicable.

2.

Institutions shall calculate the add-on for transactions with a counterparty that are not subject to a master netting agreement that meets the conditions set out in Article 206 of the CRR on a transaction-by-transaction basis in accordance with the following formula:

where:

= the add-on;

i = the index that denotes the transaction;

Ei = the fair value of securities or cash lent to the counterparty under transaction i; and

Ci = the fair value of securities or cash received from the counterparty under transaction i.

Institutions may set equal to zero where Ei is the cash lent to a counterparty and the associated cash receivable is not eligible for the netting treatment set out in Article 429b(4) of this Chapter.

3.

Institutions shall calculate the add-on for transactions with a counterparty that are subject to a master netting agreement that meets the conditions set out in Article 206 of the CRR on an agreement-by-agreement basis in accordance with the following formula:

where:

= the add-on;

i = the index that denotes the netting agreement;

Ei = the fair value of securities or cash lent to the counterparty for the transactions that are subject to master netting agreement i; and

Ci = the fair value of securities or cash received from the counterparty that is subject to master netting agreement i.

4.

For the purposes of paragraphs 2 and 3, the term counterparty includes also tri-party agents that receive collateral in deposit and manage the collateral in the case of tri-party transactions.

5.

By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 222 of the CRR, subject to a 20% floor for the applicable risk weight, to determine the add-on for securities financing transactions including those that are off-balance-sheet. Institutions may use that method only where they also use it for calculating the exposure value of those transactions for the purpose of meeting the own funds requirements as set out in points (a), (b) and (c) of Article 92(1) of the CRR.

6.

Where sale accounting is achieved for a repurchase transaction under the applicable accounting framework, the institution shall reverse all sales-related accounting entries.

7.

Where an institution acts as an agent between two parties in a securities financing transaction, including an off-balance-sheet transaction, the following provisions shall apply to the calculation of the institution's total exposure measure:

1. (a) where the institution provides an indemnity or guarantee to one of the parties in the securities financing transaction and the indemnity or guarantee is limited to any difference between the value of the security or cash the party has lent and the value of collateral the borrower has provided, the institution shall only include the add-on calculated in accordance with paragraph 2 or 3, as applicable, in the total exposure measure;
2. (b) where the institution does not provide an indemnity or guarantee to any of the involved parties, the transaction shall not be included in the total exposure measure;
3. (c) where the institution is economically exposed to the underlying security or the cash in the transaction to an amount greater than the exposure covered by the add-on, it shall include in the total exposure measure also the full amount of the security or the cash to which it is exposed;
4. (d) where the institution acting as agent provides an indemnity or guarantee to both parties involved in a securities financing transaction, the institution shall calculate its total exposure measure in accordance with points (a), (b) and (c) separately for each party involved in the transaction.

[Note: This rule corresponds to Article 429b of the CRR as it applied immediately before revocation by the Treasury.]

1.

Institutions shall calculate, in accordance with Article 111(1) of the CRR, the exposure value of off-balance-sheet items, excluding derivative contracts listed in Annex II of the CRR, credit derivatives, securities financing transactions and positions referred to in Article 429d of this Chapter.

Where a commitment refers to the extension of another commitment, Article 166(9) of the CRR shall apply.

2.

By way of derogation from paragraph 1, institutions may reduce the credit exposure equivalent amount of an off-balance-sheet item by the corresponding amount of specific credit risk adjustments. The calculation shall be subject to a floor of zero.

3.

By way of derogation from paragraph 1 of this Article, institutions shall apply a conversion factor of 10% to low-risk off-balance-sheet items referred to in point (d) of Article 111(1) of the CRR.

1.

Institutions shall treat cash related to regular-way sales and securities related to regular-way purchases which remain on the balance sheet until the settlement date as assets in accordance with point (a) of Article 429(4) of this Chapter.

2.

Institutions that, in accordance with the applicable accounting framework, apply trade date accounting to regular-way purchases and sales which are awaiting settlement shall reverse out any offsetting between cash receivables for regular-way sales awaiting settlement and cash payables for regular-way purchase awaiting settlement allowed under that framework. After institutions have reversed out the accounting offsetting, they may offset between those cash receivables and cash payables where both the related regular-way sales and purchases are settled on a delivery-versus-payment basis.

3.

Institutions that, in accordance with the applicable accounting framework, apply settlement date accounting to regular-way purchases and sales which are awaiting settlement shall include in the total exposure measure the full nominal value of commitments to pay related to regular-way purchases.

Institutions may offset the full nominal value of the commitments to pay related to regular-way purchases by the full nominal value of cash receivables related to regular-way sales awaiting settlement only where both of the following conditions are met:

1. (a) both the regular-way purchases and sales are settled on a delivery-versus-payment basis;
2. (b) the financial assets bought and sold that are associated with cash payables and receivables are fair valued through profit and loss and included in the institution's trading book.

[Note: This rule corresponds to Article 500d of the CRR as it applied immediately before revocation by the Treasury.]