Response to consultation on draft Implementing Technical Standards (ITS) on disclosure for leverage ratio
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The proposed additional break down of off-balance sheet exposures (LRCom, rows 15a, EU-15.1a, EU-15.2a and 16a) is based on materiality and it is not clear how a product would be identified as material. The guidance only outlines that, ‘Institutions shall include an additional row for each material product type that is subject to the treatment of [{LRCom; 15; *} {LRCom; EU-15.1; *} {LRCom; EU-15.2; *} {LRCom; EU-15.2; *}, give its main characteristics (name of the products and type) and the related leverage ratio exposure’.
Without a clear definition of the breakdown that is required, the proposed additional break down of off-balance sheet exposures would be based on an individual bank’s judgement. This will result in disclosure that is incomparable between banks and therefore significantly restricts the usefulness of the information.
We also generally question the value added by a breakdown of off-balance sheet exposures by product type, given that other disclosures in the financial statements or the Pillar 3 document are not normally provided on a product level.
The proposed additional breakdown of off-balance sheet exposures goes beyond the COREP requirements. To provide useful information the data fields would need to be clearly and consistently defined without room for judgement. Furthermore, the breakdown should be required at a similar level to the breakdown of other disclosures in the financial statement or Pillar 3 document (e.g. exposure class, portfolio level) to enable users to analyse it in the context of other disclosures provided. However, care must be taken when constructing the definitions to avoid disclosures becoming operationally burdensome.
In addition, we note that the guidance to data field LRCom {EU-10a; *} requires clarification. The last paragraph of the guidance can be read to imply that the counterparty exposure measure to be reported in this field excludes ‘normal’ repos and only includes reverse repos and stock borrowing (and the small population, if any, of repos and stock loans where the transaction is derecognised for accounting purposes). This is because the final paragraph of the guidance for this item requires us to exclude the cash and security legs of repos and stock loans. We do not believe that this is the intention of the regulation and would welcome clarification.
We recommend the final paragraph to be deleted together with the mirroring guidance in LRSum {1;010} and LRCom {1;*}. If, however, it is indeed the intention of the regulation that ‘normal’ repos and stock loans be excluded from the calculation of the SFT exposure measure, the first main paragraph of the guidance could instead be amended as follows:
The exposure for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions calculated in accordance with Article 220 (1) to (3) Regulation(EU) NO. 575/2013. Transactions which are included in field LRCom {1; *} should be excluded from this calculation.
We also note that there is room for interpretation as to the exposure measure to be included in the data field LRSpl, EU-30: ‘Total on-balance sheet exposures (excluding derivatives and SFTs)’. We are assuming that this data field is based on the prudential exposure measures. If this assumption is correct this could be clarified by including a statement to the effect that this number should equal to {LRSum; 01; 20}.
The CP did not include a question on template LRQua, however, as highlighted in our letter, we have concerns about such a reporting template for flow text. Such a template will prevent the information required by the template to be embedded with other disclosures which would provide a context for users to properly assess the measure. The disclosure of the required information in a template would also not make such descriptions more comparable and we therefore question the benefit of this template. To complement the quantitative disclosures (LRSum, LRCom, LRSpl) it would be better, in our view, to disclose the required qualitative information on the leverage ratio in free format around the tables rather than within specific text boxes.
Are the instructions provided in annex 2 on the breakdown of leverage ratio exposure of LRCom and LRSpl sufficiently clear? Should the instructions for some rows be clarified? Which ones in particular? Are some rows missing?
Subject to our comments below, we agree that the data field definitions are generally clear and do not require further clarification.The proposed additional break down of off-balance sheet exposures (LRCom, rows 15a, EU-15.1a, EU-15.2a and 16a) is based on materiality and it is not clear how a product would be identified as material. The guidance only outlines that, ‘Institutions shall include an additional row for each material product type that is subject to the treatment of [{LRCom; 15; *} {LRCom; EU-15.1; *} {LRCom; EU-15.2; *} {LRCom; EU-15.2; *}, give its main characteristics (name of the products and type) and the related leverage ratio exposure’.
Without a clear definition of the breakdown that is required, the proposed additional break down of off-balance sheet exposures would be based on an individual bank’s judgement. This will result in disclosure that is incomparable between banks and therefore significantly restricts the usefulness of the information.
We also generally question the value added by a breakdown of off-balance sheet exposures by product type, given that other disclosures in the financial statements or the Pillar 3 document are not normally provided on a product level.
The proposed additional breakdown of off-balance sheet exposures goes beyond the COREP requirements. To provide useful information the data fields would need to be clearly and consistently defined without room for judgement. Furthermore, the breakdown should be required at a similar level to the breakdown of other disclosures in the financial statement or Pillar 3 document (e.g. exposure class, portfolio level) to enable users to analyse it in the context of other disclosures provided. However, care must be taken when constructing the definitions to avoid disclosures becoming operationally burdensome.
In addition, we note that the guidance to data field LRCom {EU-10a; *} requires clarification. The last paragraph of the guidance can be read to imply that the counterparty exposure measure to be reported in this field excludes ‘normal’ repos and only includes reverse repos and stock borrowing (and the small population, if any, of repos and stock loans where the transaction is derecognised for accounting purposes). This is because the final paragraph of the guidance for this item requires us to exclude the cash and security legs of repos and stock loans. We do not believe that this is the intention of the regulation and would welcome clarification.
We recommend the final paragraph to be deleted together with the mirroring guidance in LRSum {1;010} and LRCom {1;*}. If, however, it is indeed the intention of the regulation that ‘normal’ repos and stock loans be excluded from the calculation of the SFT exposure measure, the first main paragraph of the guidance could instead be amended as follows:
The exposure for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions calculated in accordance with Article 220 (1) to (3) Regulation(EU) NO. 575/2013. Transactions which are included in field LRCom {1; *} should be excluded from this calculation.
We also note that there is room for interpretation as to the exposure measure to be included in the data field LRSpl, EU-30: ‘Total on-balance sheet exposures (excluding derivatives and SFTs)’. We are assuming that this data field is based on the prudential exposure measures. If this assumption is correct this could be clarified by including a statement to the effect that this number should equal to {LRSum; 01; 20}.
Our analysis shows that no impacts incremental to those included in the text of the Level 1 text are likely to materialise. Do you agree with our assessment? If not please explain why and provide estimates of such impacts whenever possible.
We generally agree that no significant impacts incremental to those caused by the provisions in the CRR are likely to materialise. However, the significance of the incremental impacts of the proposals cannot be fully considered without an understanding of the frequency at which the disclosure templates would be required. Without this, it is not possible to form a view on the operational effort involved. In our view such detailed disclosure templates should only be required on an annual basis at the same time as the publication of banks’ Annual Report and Accounts and the above statement should be seen in this context.The CP did not include a question on template LRQua, however, as highlighted in our letter, we have concerns about such a reporting template for flow text. Such a template will prevent the information required by the template to be embedded with other disclosures which would provide a context for users to properly assess the measure. The disclosure of the required information in a template would also not make such descriptions more comparable and we therefore question the benefit of this template. To complement the quantitative disclosures (LRSum, LRCom, LRSpl) it would be better, in our view, to disclose the required qualitative information on the leverage ratio in free format around the tables rather than within specific text boxes.