BKLM353100 - Chargeable equity and liabilities: netting: calculation
To calculate the bank levy the entity’s net settlement liabilities should be reduced by the amount (but not below nil) of the entity’s net settlement assets by taking the following steps:
- Total the relevant liabilities covered by the netting agreement.
- Deduct the total of any relevant assets covered by the same netting agreement to the extent of the liabilities.
- The result is the netted liabilities.
The net settlement assets and net settlement liabilities include any assets or liabilities recognised in respect of cash collateral which are also subject to the same netting agreement.
Netting examples: note that for the purposes of these examples, M and N have a legally effective and enforceable netting agreement that qualifies for netting for bank levy purposes.
Derivatives and cash collateral example
Offsetting loans and deposits
Reverse repo
Derivatives and cash collateral example
M has following balances with counterparty N:
- Derivative asset of 100
- Derivative liability of 90
M receives cash collateral from N of 10 - for which it must recognise a liability of 10.
For bank levy netting purposes, M’s net settlement liabilities include the derivative liability of 90, and the liability reflecting the obligation to return collateral of 10.
M’s net settlement assets include the derivative asset of 100.
| M’s net settlement assets and liailities | Amount |
|---|---|
| M’s net settlement assets | - |
| Derivative asset | 100 |
| M’s net settlement liabilities | - |
| Derivative liability | 90 |
| Obligation to return cash collateral | 10 |
| Netted liabilities: | 0 |
Thus in this case the effect of netting is to reduce M’s liabilities to N for bank levy purposes to nil.
Offsetting loans and deposits
M has balances with a number of entities in the N group. N is a financial counterparty (so deposits do not qualify for the reduced rate).
M’s financial statements include the following balances:
- 2 year fixed rate deposit from N1 of 100
- Short term loan to N2 of 80
- Overnight deposit from N3 of 20
| M’s net settlement assets and liabilities | Amount |
|---|---|
| M’s net settlement assets | - |
| Short term loan (N2) | 80 |
| M’s net settlement liabilities | - |
| 2 year fixed rate deposit (N1) | 100 |
| Overnight deposit (N3) | 20 |
| Netted liabilities: | 40 |
The netted liabilities should be apportioned between long and short term in the same proportions as the gross liabilities. Thus the netted liabilities would be split thus:
Short term: 7
Long term: 33
Such netting could also be effective where the balances are between different entities in the M group and different entities in the N group, as long as the relevant netting agreement is viewed as being legally effective and enforceable.
Reverse repo
M enters into reverse repo with N (M transfers cash 100 to N and receives securities with same value from N). M then sells (shorts) securities into the market (to CP).
Upon entering into the reverse repo, M derecognises the cash, and recognises a repo debtor of 100:
| - | Amount |
|---|---|
| Cr cash | 100 |
| Dr repo debtor | 100 |
Upon sale of the securities, M must recognise an obligation to return the securities:
| - | Amount |
|---|---|
| Cr obligation to return security | 100 |
| Dr cash | 100 |
M’s net settlement assets and liabilities are each 100 from this transaction. M’s liability for levy purposes from the transaction is thus nil.
If M does not sell the securities received, then it has no net settlement liabilities (and no liability for levy purposes from the transaction).
The same analysis applies where the legal form of the transaction is a stock loan for cash collateral.
For establishing who is the relevant entity and the counterparty see the guidelines at BKLM354000.