Asset amount deducted - Tier 1 capital (Derivatives Cash Flow Hedge)

Derivatives positions can be an Asset or a Liability depending on market situations, while their related CF hedge amount is always a Credit/Debit amount booked on Equity level, thus the CF hedge reserve does not fully match an asset in the leverage ratio. Shall we always deduct the cash flow hedging reserve in Leverage Ratio calculation?

In the Leverage Ratio calculation , and with reference to the template C 47.00 - LEVERAGE RATIO CALCULATION (LRCalc) and the ITS related to the row 270  (-) Asset amount deducted - Tier 1 capital  - fully phased-in definition : “Point (b) of Article 429a(1) and point (a) of Article 499(1) CRR It includes all the adjustments that target the value of an asset and which are required by: - Articles 32 to 35 CRR, or - Articles 36 to 47 CRR, or - Articles 56 to 60 CRR, as applicable. Institutions shall take into account the exemptions, alternatives and waivers to such deductions laid down in Articles 48, 49 and 79 CRR, without taking into account the derogation laid down in Chapters 1, 2 and 4 of Title I of Part Ten CRR. To avoid double counting, institutions shall not report adjustments already applied pursuant to Article 111 CRR when calculating the exposure value in {0010;0010} to {0267;0010}, nor shall they report any adjustment that does not deduct the value of a specific asset. As these amounts are already deducted from the capital measure, they reduce the leverage ratio exposure and shall be reported as a negative figure”   The above clearly states that the amounts to be used are the one related to underlying asset: ( “…adjustments that target the value of an asset”  and “..nor shall they report any adjustment that does not deduct the value of a specific asset.”) While unlike NSFR, the starting point of Leverage Ratio LR numerator is Tier I after deductions, which doesn’t enable us to fully identify the tier I deductions with their related Assets, thus not able to identify what’s really linked between the Equity adjustments and the related underlying asset. For instance , IRB shortfall and Additional value adjustments are clearly linked to Assets portfolio but its not 100% the case for Derivatives and their Cash flow hedge reserve. Derivatives positions can be an Asset or a Liability depending on market situations, while their related CF hedge amount is always a Credit/Debit amount booked on Equity level, thus the CF hedge reserve does not fully match an asset in the leverage ratio. In addition when the derivatives are on asset side and we have a Credit/losses amounts under Cash Flow hedge reserve, when adding the amount to leverage ratio denominator in C47.00 row 270 “(-) Asset amount deducted - Tier 1 capital  - fully phased-in definition” then aggregated with exposure under row 290 “Total Leverage Ratio exposure - using a transitional definition of Tier 1 capital” we are increasing the related asset exposure on top of the derivatives value thus conflicting with the general statement that adjustments deduct the value of a specific asset.