Question ID:
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Leverage ratio
COM Delegated or Implementing Acts/RTS/ITS/GLs:
Delegated Regulation (EU) 2015/62 - DR with regard to the leverage ratio
Type of submitter:
Credit institution
Subject Matter:
Net to Gross Ratio calculation for Derivatives for Leverage Ratio

Can the NGR calculation as defined in QA_2016_2735 be extended to the Leverage ratio treatment for derivatives as well?

Background on the question:

After the recent publication by EBA QA 2016_2735, the NGR is defined as the ratio of Net RC/ Gross RC, where, RC net = Asset exposure - Liability exposure + collateral posted - collateral received RC gross = Asset exposure + collateral posted. 

Date of submission:
Published as Final Q&A:
EBA Answer:

According to Article 429a(1) of Regulation (EU) No 575/2013 (CRR), as amended by Regulation (EU) 2015/62, the leverage ratio exposure value of contracts listed in Annex II of the CRR and of credit derivatives should be determined in accordance with the method set out in Article 274 CRR (Mark-to-Market Method for credit risk) unless provided otherwise in the leverage ratio framework.

In particular, as regard the deductions, Article 429a(3) CRR expressly states that institutions may deduct variation margin received in cash from the counterparty from the current replacement cost portion of the exposure value if under the applicable accounting framework the variation margin has not already been recognised as a reduction of the exposure value and only when all the stringent conditions listed in the same Article are met.

Moreover, Article 429a(4) CRR specifies that the deduction of variation margin received shall be limited to the positive current replacement cost portion of the exposure value and that variation margin received in cash shall not be used to reduce the potential future credit exposure amount.

Consequently even though the derivative part of the leverage ratio exposure measure has not been directly covered by point (b) of Article 429(5) CRR (non-recognition principle of financial collateral, guarantees or credit risk mitigation purchased), it becomes clear from the wording of Article 429a(3) and (4) CRR and its context and objectives that other kinds of margin as well as other forms of collateral received cannot be used to reduce the replacement cost or potential future exposure components of the exposure value of derivatives. The calculation of the NGR as published by QA 2016_2735 shall thus not be applicable for leverage ratio purposes due to the recognition of collateral received in the formula.

Final Q&A