Module 11 Leverage Ratio Guidance (Basel III)

Summary

This is technical guidance from the Guernsey Financial Services Commission explaining how locally incorporated banks should complete Module 11 (the Leverage Ratio calculation) of the BSL/2 prudential return, in line with the Basel III framework. It is a line-by-line explanation of what to report in each field, not a standalone rule creating new reporting obligations; the underlying requirement to submit BSL/2 sits elsewhere.

• On balance sheet exposures: Report all on balance sheet assets (including derivative and SFT collateral) less assets already deducted from Tier 1 capital.
• Derivative exposures: Report replacement cost and potential future exposure add-ons; collateral received generally cannot be netted against derivative exposures, and exposure must be grossed up for collateral provided or received that reduced balance sheet values.
• Cash variation margin: Specific netting/deduction treatment is permitted only if strict conditions on segregation, daily mark-to-market, currency matching, full settlement and an enforceable master netting agreement are met.
• Client clearing and QCCP exposures: Sets out when a clearing member need not recognise trade exposures to a qualifying central counterparty in the exposure measure.
• Written credit derivatives: Report gross notional amounts sold, with permitted offsets for purchased protection and negative fair value changes already reflected in Tier 1 capital.
• SFT exposures: Explains gross reporting of securities financing transaction assets, permitted netting of cash payables/receivables, and calculation of counterparty current exposure (with and without a qualifying master netting agreement).
• Off balance sheet exposures: Report gross notional off balance sheet exposure and apply credit conversion factors (subject to a 10% floor for unconditionally cancellable commitments).
• Ratio calculation: Total exposures (sum of on balance sheet, derivative, SFT and other off balance sheet items) are divided into Tier 1 capital to automatically produce the Basel III leverage ratio percentage.
• Annexes: Annex 1 sets bilateral netting conditions (legal enforceability, no walkaway clauses, ANet formula); Annex 2 defines a qualifying master netting agreement for repo style transactions.

The guidance itself does not impose new deadlines; it supports accurate completion of the existing BSL/2 leverage ratio return by locally incorporated banks.

Key obligations

• Locally incorporated banks must calculate and report the Basel III leverage ratio using the methodology set out for Module 11 of the BSL/2 return.
• Banks must not net collateral received against derivative exposures when calculating the exposure amount, and must gross up replacement cost by any collateral amount that reduced its reported value.
• Banks may only reduce the leverage exposure measure using cash variation margin netting or deduction where all specified conditions (segregation, daily marking to market, currency matching, full settlement, enforceable master netting agreement) are satisfied.
• Banks must gross up their exposure measure for derivatives collateral provided where that collateral reduced the value of balance sheet assets under their accounting framework.
• Banks relying on bilateral netting for leverage ratio purposes must satisfy the Commission that a legally enforceable netting contract, supporting legal opinions, and review procedures are in place, and must exclude contracts containing walkaway clauses.
• Banks must apply the specified credit conversion factors (subject to a 10% floor) when converting off balance sheet exposures to credit equivalent amounts.

Applies to

locally incorporated banks