34.Secured lending and borrowing in the form of SFTs is an important source of leverage. How the framework measures exposure from SFTs depends on whether the bank is acting as a principal or agent. For principal banks, the exposure measure is equal to the sum of gross SFT assets (gross receivables related to SFTs, with some adjustments) and an amount representing counterparty credit risk. When acting as an agent, depending on the structure of the SFT, a bank may be able to ignore the collateral involved and reflect only the counterparty credit risk component, or it may have to include both. The framework also includes specific rules for SFTs that qualify for sale treatment under the operative accounting regime.

35.A degree of netting is allowed for SFTs, but only where strict criteria are met (for example, same counterparty, same maturity date). In these cases, the net position provides the better measure of the degree of leverage in a set of transactions between counterparties.

36.When a bank acts as a principal, its SFT exposure is the sum of gross SFT assets (subject to adjustments) and a measure of counterparty credit risk calculated as the current exposure without an add-on for potential future exposure.

37.For SFT assets subject to novation and cleared through QCCPs, “gross SFT assets recognized for accounting purposes” are replaced by the final contractual exposure, that is, the exposure to the QCCP after the process of novation has been applied, given that pre-existing contracts have been replaced by new legal obligations through the novation process. However, banks can only net cash receivables and cash payables with a QCCP if the requisite criteria are met. Any other netting permitted by the QCCP is not permitted for the purposes of the Basel III leverage ratio. Gross SFT assets recognized for accounting purposes must not recognize any accounting netting of cash payables against cash receivables (e.g. as currently permitted under the IFRS accounting framework). This regulatory treatment has the benefit of avoiding inconsistencies from netting which may arise across different accounting regimes.

38.Where a bank acting as an agent in an SFT does not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and therefore need not recognize those SFTs in its leverage ratio exposure measure.

39.In situations where a bank is economically exposed beyond providing an indemnity or guarantee for the difference between the value of the security or cash its customer has lent and the value of the collateral the borrower has provided, a further exposure equal to the full amount of the security or cash must be included in the leverage ratio exposure measure. An example of this scenario could arise due to the bank managing collateral received in the bank’s name or on its own account rather than on the customer’s or borrower’s account (e.g. by on-lending or managing unsegregated collateral, cash or securities). However, this does not apply to client omnibus accounts that are used by agent lenders to hold and manage client collateral provided that client collateral is segregated from the bank’s proprietary assets and the bank calculates the exposure on a client-by-client basis.