The consultation comes despite the fact that the Committee has not yet agreed the timing and method for recognising regular-way purchases or sales of financial assets that have not yet been settled differ across different accounting frameworks. 

At the moment, these trades can be accounted for either on the trade date (trade date accounting) or on the settlement date (settlement date accounting). For trade date accounting, the offsetting of cash receivables and payables associated with sales and purchases of financial assets, respectively, is allowed under certain accounting frameworks, but disallowed under others.

The consultation sets out proposals to clarify the calculation of regular-way purchases and sales of financial assets for purposes of the Basel III leverage ratio exposure measure to ensure that differences in accounting frameworks do not affect the calculation among comparably situated banks. It is also designed to ensure that the Basel III leverage ratio exposure measure properly reflects the inherent leverage associated with these trades.

Under certain accounting frameworks, banks using trade date accounting that are active securities market-makers are allowed to offset cash receivables for unsettled regular-way sales of securities against cash payables for unsettled regular-way purchases of securities. The committee says this accounting treatment aims to minimise large day-to-day swings in market-makers’ balance sheets.

It is now considering two possible options for the treatment for measuring regular-way purchases and sales of financial assets for the purposes of the Basel III leverage ratio to ensure consistent measure of these exposures across banks regardless of the accounting framework used by a bank. The first option requires banks using settlement date accounting to treat unsettled financial asset purchases as offbalance sheet items subject to a 100% credit conversion factor (CCF).  Banks using trade date accounting must include the gross cash receivables owed that are attributable to sales of financial assets that are pending settlement.

The committee says this approach implies that banks must reverse out any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets that may be recognised under the applicable accounting framework.

The second option under consideration, in addition to these criteria, banks using trade date accounting may, subject to certain conditions, offset cash receivables and cash payables, with an equivalent effect to be permitted for banks using settlement date accounting.

The proposed revisions  also include the following:

• use of a modified version of the standardised approach for measuring counterparty credit risk exposures (SA-CCR) instead of the Current Exposure Method (CEM);
• clarification of the treatment of provisions and prudential valuation adjustments for less liquid positions to avoid double-counting; and
• alignment of the credit conversion factors for off-balance sheet items with those proposed for the standardised approach to credit risk under the risk-based framework.

In addition, the committee is also seeking comment on an additional leverage ratio requirement applicable to global systemically important banks.

The consultation is open for comment until 6 July 2016.  Details on the Revisions to the Basel III leverage ratio framework - consultative document are here