Basel III Framework - Leverage Ratio Rules and Guidelines

Summary

This is CIMA's Basel III Leverage Ratio Rules and Guidelines, effective 1 December 2019, which introduces a simple, non-risk-based leverage ratio requirement to supplement the risk-based capital requirements set out in CIMA's Minimum Capital Requirements (Pillar I) rules. It applies to all banks that fall within the scope of the capital adequacy rules under those Minimum Capital Requirements, and is issued under section 10(1) of the Banks and Trust Companies Law.

• Leverage ratio definition: Tier 1 capital (the capital measure) divided by a total exposure measure (the denominator), expressed as a percentage.
• Minimum ratio: Banks must maintain a minimum leverage ratio of 3% at all times, though CIMA may set a different ratio for a particular bank on a case-by-case basis.
• Exposure measure components: The sum of on-balance sheet exposures, derivative exposures, securities financing transaction (SFT) exposures, and off-balance sheet items, each calculated according to detailed methodologies set out in the body of the rules and the annex.
• Methodology details: These methodologies include credit conversion factors for off-balance sheet items, and treatment of collateral, netting, and variation margin.

Calculations of both the capital measure and exposure measure must generally be performed on a quarter-end basis, though CIMA may permit or require different frequencies, including more frequent calculation by a bank subject to CIMA approval and consistent application. The rules are formatted so that binding rule provisions (marked with an 'R') are distinguished from guidance text within the same document.

Key obligations

• Banks within scope must maintain a minimum leverage ratio of 3% at all times, unless CIMA sets a different ratio for that bank.
• Banks must calculate the capital measure (Tier 1 capital, net of specified regulatory deductions) and the exposure measure in accordance with the methodology set out in the Rules and Guidelines.
• Banks must calculate both the capital measure and exposure measure on a quarter-end basis, unless CIMA sets a different frequency; banks wishing to calculate more frequently must obtain CIMA approval and apply the frequency consistently.
• Banks must include all balance sheet assets (less specified deductions) in the exposure measure and must not net assets and liabilities or reduce the exposure measure using collateral, guarantees or other credit risk mitigants except as expressly permitted.
• Banks must not deduct liability items (e.g., fair value gains/losses on liabilities, own-credit valuation adjustments) from the leverage ratio exposure measure.
• Banks must calculate derivative exposures using the replacement cost plus potential future exposure add-on methodology, applying eligible bilateral netting treatment only where the Annex criteria are met.
• Banks must gross up the exposure measure for derivatives collateral provided that reduced balance sheet asset values, and must not reduce exposure by collateral received.
• Banks must convert off-balance sheet commitments into credit exposures using the specified credit conversion factors (100%, 50%, 20%, or 0%) set out in the rules, applying the lower CCF where more than one could apply.

Applies to

banks, licensees holding a banking licence under the Banks and Trust Companies Law

Deadlines

• 1 December 2019: Implementation date of the Leverage Ratio Rules and Guidelines.
• quarter-end basis: Banks must calculate the capital measure and exposure measure for the leverage ratio on a quarter-end basis unless CIMA specifies a different frequency.