BoE :: PS5/23 – Risks from contingent leverage

In response to the BoE consultation paper CP12/22, BoE have published the policy statement (PS5/23) which is to enable institutions understand the continent leverage and the risk that arise from these leverage positions. And further how the risk can affect the quality of the capital maintained and can adversely impact the viability of the institutions especially during the stress times.

As part of the ICAAP policy, firms that are subject to Leverage ratio minimum requirements (LREQ firms) are expected to factor in the risk that arise from certain specific types of trades that forms part of leverage; however it is believed that such trades behave differently in financial and economic terms during the stress times. Trade positions treated more risker than others are collateral swaps; netted repos; agency trade models to transact in SFTs; and cash and synthetic prime brokerage positions. PRA proposes firms to have in place sound, effective, and comprehensive strategies, processes, and systems to identify and manage any major sources of risk that affect their capital adequacy and the risks of excessive leverage.

Further for the supervision, there are changes to the regulatory reporting that includes additional of new reporting templates in the Leverage reporting framework from the BoE. Four new templates with details of the trades with higher risk from contingent leverage are added to the taxonomy that is applicable from 01/01/2024. These new templates are required to provide with a breakdown of the highest level of liquidity (Level 1 HQLA), exposures designated for franchise clients, and any intra-group exposures for firms.

TitanRP dynamic reporting GRiD and AI powered taxonomy, template and annotations automation enable us to upgrade technology in a very short span. And so allowing customers to understand the complexity of data requirements and processing for these templates and be ready for the supervisory submission in time for next year.