PS14/24 – Leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 28/23: Leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework. It also contains the PRA’s final policy, as follows:

• amendments to the Glossary, Leverage Ratio (CRR), Disclosure (CRR) and Reporting (CRR) Parts of the PRA Rulebook (Appendix 2);
• updates to supervisory statement (SS) 45/15 (Appendix 3);
• amendments to the ‘Instructions for leverage ratio disclosures’ (Appendix 4) (the ‘disclosure instructions’); and
• amendments to the ‘Instructions for leverage ratio reporting’ (Appendix 5) (the ‘reporting instructions’).
  

1.2 This PS is relevant to Capital Requirements Regulation (CRR) firms and CRR consolidation entities on an individual, consolidated, and where relevant, sub-consolidated basis. This PS is not relevant to credit unions.

Background

1.3 Following an FPC direction, PRA rules require firms to exclude from the leverage ratio any claims on central banks matched by liabilities in the same currency and of identical or longer maturity. The exclusion is a measure to respond to extraordinary circumstances that have led to a significant increase in central bank claims in the financial system. The FPC reviews its direction to the PRA, including the exclusion of central bank claims, annually, as required by legislation.

1.4 A new model of reserves holding has emerged where the reserves of several firms are co-mingled in a single account held at the central bank – known as an ‘omnibus’ account. This raised the question of whether the reserves held on such accounts (‘omnibus account reserves’) should be excluded from the leverage ratio as traditional individually-held reserves currently are.

1.5 In CP28/23 the PRA proposed to:

• introduce new rules to apply the exclusion consistently across reserves held on omnibus accounts as well as traditionally-held reserves, with the exclusion of the former subject to specific additional conditions, and to add related material to supervisory statement (SS) 45/15 – The UK leverage ratio framework; and
• make minor amendments to SS45/15 and the leverage ratio disclosure and reporting instructions to provide clarification about the PRA’s expectations and ensure consistency with PRA rules.

1.6 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (‘feedback’). Details of any significant changes are also published. In this PS, the ‘Feedback to responses’ chapter contains an account of the representations made in response to the CP (summarised below) as well as the PRA’s feedback.

Summary of responses

1.7 The PRA received one response to the CP.^{footnote [1]} The respondent found that the PRA’s proposals on applying the exclusion of central bank claims to omnibus account reserves to be sensible, with no further comment. They also made several points or requests for clarification in respect of the proposed changes to a table in SS45/15 which summarises the frequency with which firms are required to make Pillar 3 leverage ratio related disclosure under PRA rules (Table 2 - ‘the disclosure table’). These are fully set out in Chapter 2.

Changes to draft policy

1.8 Only minor changes are being made to the proposals consulted upon in in CP28/23. Non-substantive changes have been made to the legal instrument in Appendix 2 which applies the exclusion of central bank claims from the leverage ratio consistently across omnibus account reserves as well as traditionally-held reserves. Some further minor changes have been made to SS 45/15, the disclosure instructions and Article 451 of the Disclosure (CRR) Part of the PRA Rulebook for consistency and clarity.

1.9 These changes include:

• ensuring that the disclosure table is clear, in all cases: (i) which disclosure values are only of relevance to LREQ firms;^{footnote [2]} and (ii) which disclosure values are only of relevance to firms subject to the additional leverage ratio buffer requirements (a similar amendment has been made to the disclosure instructions);
• deleting a sub-paragraph of Article 451 which is no longer applicable;^{footnote [3]} and
• other non-substantive amendments.

1.10 When making rules, the PRA is required to comply with several legal obligations. At the consultation stage, in CP28/23 the PRA published an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to various matters, including the regulatory principles.^{footnote [4]}

1.11 This explanation also applies to the final policy and rules. The PRA has reflected on whether the minor changes made outlined above necessitate any adjustment in the analysis or the explanation provided. It has concluded they do not. The PRA considers that the impact of the final rules on mutuals, and on mutuals as compared with other PRA-authorised persons, is not significantly different from that of the CP draft rules.

1.12 When making CRR Rules and certain rules applying to holding companies, the PRA must consider and consult HM Treasury about the likely effect of the rules on relevant equivalence decisions. The PRA has done so and not identified any effect on such decisions.

1.13 In addition, when making CRR Rules or rules applying to certain holding companies, the PRA must also publish a summary of the purpose of the rules.^{footnote [5]} The rules applying the exclusion of central bank claims from the leverage ratio to omnibus account reserves – matching the current treatment of traditionally-held reserves – aim to implement the Financial Policy Committee’s (FPC) direction consistently by excluding all asset types which are claims on central banks. The further conditions to which their exclusion is subject will support the PRA’s safety and soundness objective by ensuring that, where they are excluded, any additional risks associated with omnibus account reserves have been mitigated. The rules implementing changes to the disclosure and reporting instructions aim to ensure the clarity and consistency of the PRA’s policy material.

Implementation [and next steps]

1.14 All the proposed changes in this policy statement – to the PRA Rulebook, to SS45/15, and to the disclosure and reporting instructions – will take effect on 5 August 2024.

1.15 As noted in the updated version of SS45/15, in accordance with Fundamental Rule 7, the PRA expects firms in scope of the leverage ratio minimum requirement to notify the PRA of existing or planned participation in an omnibus account. Firms should also tell the PRA whether, in respect of reserves held on the account, they meet or expect to meet the conditions in Article 429a(A2).

1.16 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [6]}

2: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [7]}

2.2 The PRA has considered the representations received in response to CP28/23. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The PRA received a single response to CP28/23. This response welcomed the proposals, including the proposal to apply the exclusion of central bank claims from the leverage ratio consistently to omnibus account reserves, as ‘sensible’.

2.4 However, they raised several points on the proposed changes to the disclosure table in SS45/15.

Feedback on disclosure frequency related changes to SS45/15

2.5 In CP28/23, the PRA proposed various changes to the disclosure table with the purpose of ensuring consistency with PRA rules on disclosure frequency. Similar amendments were proposed to the disclosure instructions.

2.6 The respondent made three points on the disclosure table. First, they queried why the PRA had proposed to remove an indication that the LREQ-specific quarterly disclosure items in the LRCom^{footnote [8]} template should include the period-end total leverage exposure measure^{footnote [9]} (LEM). They said that period-end LEM is a ‘a key total’ and asked that ‘[the indication that it should be disclosed on a quarterly basis] is retained, or the PRA at least explains their rationale for removing it’.

2.7 Having considered this element of the response carefully, the PRA has decided to go ahead with the amendments to the table (and corresponding amendments to the disclosure instructions) as consulted on. PRA rules on quarterly LREQ disclosure^{footnote [10]} only mandate the quarterly disclosure of average LEM, not period-end LEM. The unamended table did not reflect this, as it substituted the latter for the former. The PRA continues to consider the disclosure obligations in PRA rules to be appropriate (average LEM is judged to be a more informative metric than period-end LEM, as it reflects a firm’s activity over a quarter rather than just at one point in time); and the items in the disclosure table should match the disclosure obligations in the rules.

2.8 The PRA notes that many LREQ firms must disclose period-end LEM in another template – the KM1^{footnote [11]} template – on a quarterly basis, so in many cases the information is available elsewhere. Furthermore, those LREQ firms which are only required to disclose period-end LEM on a semi-annual basis, rather than at a quarterly frequency, are free to disclose so more frequently if they wish – it must be calculated in any case to determine firms’ period-end leverage ratios, which themselves must be disclosed quarterly.

2.9 The respondent’s second point was in relation to duplication of disclosure items. They said that there was ‘considerable crossover’ between the LRCom template and the KM1 template, and that there was uncertainty over whether – in respect of duplicated items – firms should disclose duplicates twice (in both templates) or only in KM1 (with LRCom containing just items unique to that template). The respondent requested that the PRA note in a footnote to the disclosure table that firms may take the latter approach.

2.10 The PRA has decided not to incorporate such a footnote into the amendments to the disclosure table. The LRCom template is designed to provide a detailed breakdown of the components of the leverage ratio denominator, as well as information on the actual leverage ratio, minimum requirements, and buffers. The PRA considers its completeness is important to user understanding and that it should be disclosed as designed in the interest of user accessibility.

2.11 Finally, the respondent asked the PRA to ‘revisit’ the frequency and level of application of Pillar 3 disclosures. In the respondent’s view, disclosure should be limited to the highest level of consolidation and aligned with financial reporting – as it is most helpful to the user read together with associated financial information, which is often published by firms less frequently than every quarter and restricted to the highest level of consolidation. More broadly, they queried the value disclosures provide to users.

2.12 The PRA has reflected on this point, but it regards broader Pillar 3 disclosure rules to be out of scope of CP28/23, which was focussed (in respect of its proposed disclosure changes) on ensuring the clarity and consistency of the PRA’s policy material.