Based on Article 429e of the Regulation (EU) No 575/2013 (CRR)
Article 429b, of the delegated act of the regulation 575/2013 on leverage ratio, in addition to the exposure value of repurchase transactions, institutions shall include in the exposure measure an add-on for counterparty credit risk determined in accordance to paragraph 2 or 3 of Article 429e 429b, as applicable. The Bank calculates the exposure of Securities Financing Transactions (SFT) according to Article 223 of the regulation 575/2013 (Financial Collateral Comprehensive Method) .
If for example, the Bank has a German government bond of fair value (FV) EUR 100.000 with maturity less than a year, and uses it as a collateral for a repurchase agreement with a maturity of less than a year, and receives EUR 50.000 in cash, then according to Article 223 CRR the exposure value of the SFT will be :
plus volatility adjustment of 0.354%* FV of 354
minus cash received of 50.000
i.e. total exposure of EUR 50.354
In addition, the add on according to article 429e
429b, will be the FV minus cash received i.e. EUR 50.000
According to the Annex 2 -ITS on reporting for the LR instructions , the row 300 of template C 47.00 (LEVERAGE RATIO CALCULATION (LRCalc)) which is the Total Leverage Ratio exposure - using a transitional definition of Tier 1 capital, includes both the exposure value of the SFT and the add on amount. Hence, for the specific SFT, the total leverage exposure would include a total of EUR 100.354 (which is more than the FV of the bond)
In addition, it should be noted that since the German Government bond is an on balance sheet exposure, credit risk is also calculated for capital requirements purposes.
Can you please confirm that this is the correct treatment?
The Bank follows the Financial Collateral Comprehensive method (Article 223 of CRR) for the calculation of the exposure value of the SFT. In addition all the repurchase agreements are under master netting agreements
429(5)(a) 429b(1)(a) of Regulation (EU) No 575/2013 (CRR) as amended by the Delegated Regulation (EU) 2015/62 (DR), specifies that the leverage ratio exposure value of assets, including SFTs, should be calculated in accordance with the first sentence of Article 111(1) CRR. As established in Article 429(4)(c) of the CRR, Tthe counterparty credit risk add-on component should be calculated in accordance with Article 429b 429e of the CRR (see Article 429(4)(c)), which provides different calculation methodologies for transactions with and without an eligible master netting agreement. As the sum of the two, the leverage ratio exposure of a single instrument may therewith exceed its accounting value. In the given example the leverage exposure value is: 100 000 EUR (the first component according to Article 111(1) CRR) + 50 000 EUR (the second component, the add-on according to Article 429b 429e of the CRR) = 150 000 EUR.
Given that none of the above Articles of the CRR makes reference to Article 223 (Financial collateral comprehensive method) of the CRR, the valuation methodology provided in Article 223 of the CRR is not relevant for the calculation of the leverage ratio exposure measure for SFTs.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).