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 introduce a simple, non-risk-based leverage ratio requirement to supplement the risk-based capital adequacy requirements already imposed on Cayman Islands banks under the Minimum Capital Requirements (Pillar I) framework. It is issued under section 10(1) of the Banks and Trust Companies Law.

• Scope: The rules apply to all banks that are subject to the capital adequacy rules under the Minimum Capital Requirements' scope of application.

• Leverage ratio definition: The leverage ratio is defined as Tier 1 capital (the capital measure, taking into account specified regulatory deductions) divided by a total exposure measure.
• Total exposure measure components: The total exposure measure comprises on-balance sheet exposures, derivative exposures, securities financing transaction (SFT) exposures, and off-balance sheet items.
• Calculation methodologies: Each component is calculated according to detailed methodologies set out in the document and its Annex, including credit conversion factors, replacement cost/potential future exposure for derivatives, netting eligibility criteria, and treatment of collateral and variation margin.

• Minimum ratio: Banks must maintain a minimum leverage ratio of 3% at all times.
• Calculation frequency: The ratio is calculated on a quarter-end basis, unless CIMA sets a different frequency or banks opt, with CIMA approval, for more frequent calculation.
• CIMA discretion: CIMA retains discretion to set different leverage ratio requirements or calculation frequencies for individual banks on a case-by-case basis.

The document is highly technical, providing detailed prescriptive treatment for computing the exposure measure across various transaction types, and is intended to be read together with the Minimum Capital Requirements.

Key obligations

• Banks must maintain a minimum leverage ratio (Tier 1 capital measure divided by total exposure measure) of at least 3% at all times.
• Banks must calculate the capital measure and exposure measure on a quarter-end basis, unless CIMA prescribes a different frequency or grants approval for more frequent calculation.
• Banks must compute the exposure measure using gross accounting values, generally without netting assets/liabilities or reducing exposures for collateral, guarantees or other credit risk mitigants, except as specifically permitted (e.g. eligible bilateral netting contracts, qualifying cash variation margin treatment).
• Banks must not deduct liability items (e.g. fair value gains/losses, own-credit-risk adjustments on derivative liabilities) from the leverage ratio exposure measure.
• Banks must gross up their exposure measure by the amount of any derivatives collateral provided that reduced their balance sheet asset values.
• Banks must apply prescribed credit conversion factors (100%, 50%, 20% or 0%) to off-balance sheet commitments to determine credit exposure equivalents for the exposure measure.
• Banks seeking to use more frequent leverage ratio calculations than quarter-end must obtain CIMA's approval and apply this consistently.

Applies to

banks

Deadlines

• 1 December 2019: Implementation date of the Leverage Ratio Rules and Guidelines.