formulation, which may not yield noticeable benefits because data collected from the CAR return suggests that no BSC AIs report their CCR exposures on a net basis.
Table 2 provides a high level comparison of the proposed modified CEM with the SA-CCR and the existing CEM.
SA-CCR Existing
Full recognition Full recognition Full recognition
Recognition of
Calibration Based on recent stress periods
3 Modifications to Parameters
3.1 Notional Amount
30 “Notional amount” is currently defined in the BCR as the reference amount used to calculate payment obligation between the parties to an off-balance sheet exposure.
It is proposed to provide further elaboration in the case of exchange rate, equity and commodity contracts in order to align with the definition of “adjusted notional amount” under the SA-CCR19:
(i) For exchange rate contracts, the notional amount is the foreign currency leg of the contract, converted to Hong Kong dollars. If both legs of an exchange rate contract are denominated in foreign currencies, the notional amount of
19 No amendment is needed for interest rate and credit contracts because the adjustment (i.e.
supervisory duration) to the notional amount has been subsumed into the proposed CCFs set out in Table 3.
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each leg is converted to Hong Kong dollars and the leg with the larger Hong Kong dollar value is taken as the notional amount of the contract.
(ii) For equity and commodity (including precious metal and electricity) contracts, the notional amount is the product of the current price of one unit of the stock or commodity (e.g. a share of equity or barrel of oil) and the number of units referenced by the contract.
31 The required adjustments to the notional amount currently set out in BCR §119(a) and (b)(i), (ii) and (iii) will remain largely unchanged (subject to modifications where necessary to align with the corresponding requirements under the SA-CCR).
3.2 � Residual Maturity
32 “Residual maturity” currently used in the CEM is not a defined term in the BCR and therefore is taken to have its ordinary meaning. The same term will continue to be used under the modified CEM. However, for an interest rate or credit contract that references the value of another interest rate or credit instrument (e.g. swaption or bond option), the residual maturity of the contract should be taken as the current time to maturity of the underlying interest rate or credit instrument (e.g. a European swaption with an exercise date in 6 months referencing a 5-year interest rate swap should be taken to have a residual maturity of 5.5 years instead of 0.5 year). The modification will ensure the consistency of the definition of “residual maturity” with the definition adopted in updating the existing CCFs against the supervisory factors under the SA-CCR.
3.3 � CCFs
33 The existing CCFs set out in the BCR for credit derivative contracts and other derivative contracts were introduced by the BCBS in 2004 and 1995 respectively. In light of developments in the financial markets and market movements observed during the global financial crisis, the MA considers that, if the CEM is to be retained for small BSC AIs, the CCFs must be updated to better reflect recent volatilities in major risk factors.
34 The MA has updated the CCFs based on the add-on formulas and the supervisory factors introduced by the SA-CCR and by applying conservative assumptions in respect of residual maturity20 and delta21 and assuming that derivative contracts
20 Residual maturities of 1 year, 5 years and 10 years are used respectively to calibrate the CCFs for the residual maturity buckets of ≦1 year, > 1 year but ≦ 5 years, and > 5 years.
are not covered by any margin or bilateral netting agreements (see explanations in paragraphs 27 and 28(ii)). The proposed CCFs are set out in Tables 3 and 4.
Existing Proposed appropriate proposed CCFs as shown in Table 3 accordingly.
21 Delta is assumed to be +1 taking into consideration that (a) BSC AIs rarely have positions in option contracts; and (b) short positions in primary risk factors (i.e. delta is -1) will not be included in the PFE calculation because it is proposed not to take into account bilateral netting under the modified CEM.
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Although the updated CCFs for equity and commodity contracts and credit derivative contracts with CCC-rated reference entities increase substantially (which increases are within expectation as the supervisory factors under the SA-CCR have taken into consideration volatilities during periods of stress), the updated CCFs for the major types of contract held by BSC AIs (i.e. exchange rate and interest rate contracts) only increase mildly. Hence, the MA believes that the proposed revisions to the CCFs should not have significant impacts on the capital positions of those BSC AIs that are eligible to use the modified CEM as they should have minimal derivative activities.
IV CCR FRAMEWORK FOR TRANSACTIONS WITH CCPS
36 The MA proposes to adopt the BCBS CCP Standards. The existing standards prescribed in BCR Part 6A Division 4 were recognized as interim standards when they were put in place, pending finalization of the BCBS CCP Standards.
37 Many requirements under the interim standards will be retained (including the definitions, scope of application, treatment of CCR exposures to QCCPs and the capital requirements for bank exposures to non-QCCPs). The BCBS CCP Standards have however introduced significant amendments to the methodology for determining the capital requirements for default fund contributions in order to address the shortcomings of the CEM-based interim standards which are prone to significantly over- or under-estimating capital charges for default fund contributions to some QCCPs, potentially disincentivising QCCPs from maintaining generous default funds. The key new requirements and amendments introduced by the BCBS CCP Standards are discussed below in more detail.