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“10A. Authorized institution must only use current exposure method, etc. to calculate counterparty credit risk
(1) Subject to subsections (2), (3) and (4), an authorized institution must-
(a) use the current exposure method to calculate the default risk exposures in respect of derivative contracts;
(b) use the method[s] set out in sections 76A(3) to (6), 96, 97, 123A(3) to (6), 202(2) or 209(3), as the case requires, to calculate the default risk exposures in respect of SFTs; and
(c) use the standardized CVA method-
(i) to calculate the CVA capital charge in respect of OTC derivative transactions and credit derivative contracts; and
(ii) if the institution is required to do so pursuant to a notice under subsection (5) given to it by the Monetary Authority, to calculate the CVA capital charge in respect of SFTs.
(2) An authorized institution that has obtained the Monetary Authority’s approval to use the IMM approach to calculate its market risk may apply to the Monetary Authority for approval to use the IMM(CCR) approach to calculate the default risk exposures in respect of transactions falling within any one, or any combination of 2 or more, of the following categories-
(a) derivative contracts (other than long settlement transactions);
(b) SFTs (other than long settlement transactions);
(c) long settlement transactions.
(3) Where an authorized institution has-
(a) an IMM(CCR) approval which covers derivative contracts; and
(b) an approval granted under section 18 to use the IMM approach to calculate specific risk for interest rate exposures,
the institution must, unless otherwise required by the Monetary Authority under section 10C(1), or by virtue of section 10C(2), use the advanced CVA method-
(c) to calculate the CVA capital charge in respect of OTC derivative transactions and credit derivative contracts; and
(d) if the IMM(CCR) approval also covers SFTs and the institution is required to do so pursuant to a notice under subsection (5) given to it by the Monetary Authority, to calculate the CVA capital charge in respect of SFTs.
(4) Subsection (1) does not prevent an authorized institution from using any combination of the current exposure method and the IMM(CCR) approach, or any combination of methods mentioned in subsection (1)(b) and the
IMM(CCR) approach, to calculate default risk exposures if that combination is expressly permitted by, and in
accordance with, another section of these Rules.
(5) Where the Monetary Authority determines that an authorized institution’s CVA risk arising from SFTs is material, the Monetary Authority may, in a notice in writing given to the institution, require the institution to calculate and hold CVA capital charge for its SFTs.
(6) An authorized institution must comply with a notice given to it under subsection (5).
(7) Subsections (1) to (6) apply to an authorized institution regardless of whether the transactions concerned are booked in the institution’s banking book or trading book.
10B. Authorized institution may apply for approval to use IMM(CCR) approach to calculate default risk exposures (1) An authorized institution may apply to the Monetary
Authority for approval to use the IMM(CCR) approach to calculate the default risk exposures.
(2) Subject to subsection (3), the Monetary Authority must determine an application under subsection (1) from an authorized institution by-
(a) granting approval to the institution to use the IMM(CCR) approach to calculate the default risk exposures in respect of-
(i) the transactions specified in the application;
or
(ii) such of those transactions as the Monetary Authority specifies in the approval; or (b) refusing to grant the approval, whether in whole or
in part.
(3) Without prejudice to the generality of subsection (2)(b), the Monetary Authority must refuse to grant an approval to an authorized institution to use the IMM(CCR) approach if any one or more of the requirements specified in Schedule 3A applicable to or in relation to the institution are not satisfied with respect to the institution.
(4) Subject to subsections (5) and (6), an authorized institution must use the IMM(CCR) approach to calculate the default risk exposures of all transactions that are covered by the IMM(CCR) approval.
(5) Subject to subsection (6), the Monetary Authority may specify, in his approval granted under subsection (2)(a) to an authorized institution, a transitional period in which the institution is allowed to use the current exposure method or the methods mentioned in section 10A(1)(b), as the case requires, to calculate the default risk exposures for a portion of its business if, and only if, the institution has submitted to the Monetary Authority a plan for fully
implementing the IMM(CCR) approach within a reasonable
(6) An authorized institution may choose not to apply the IMM(CCR) approach to transactions covered by the IMM(CCR) approval if it can demonstrate to the
satisfaction of the Monetary Authority that the default risk exposures to those transactions are immaterial.
(7) An authorized institution that has an IMM(CCR) approval must, for transactions that are not covered by the
IMM(CCR) approval, calculate the default risk exposures in respect of those transactions in accordance with section 10A(1).
(8) Where an authorized institution uses the IMM(CCR) approach to calculate default risk exposures, the institution shall not, without the prior consent of the Monetary
Authority-
(a) make any significant change to any internal model which is the subject of the institution’s IMM(CCR) approval; or
(b) revert to the current exposure method or the methods mentioned in section 10A(1)(b).
10C. Provisions supplementary to prescribed methods for calculation of CVA capital charge
(1) An authorized institution that falls within section 10A(3) and is permitted under section 10B(5) or (6) to apply the current exposure method to a portion of its business mentioned in section 10B(5) or transactions mentioned in section 10B(6), as the case requires, must calculate the CVA capital charge in respect of that portion or those transactions, as the case may be, using the advanced CVA method unless the Monetary Authority decides that the standardized CVA method must apply to the portion or transactions, as the case may be.
(2) Where an authorized institution’s approved VaR model referred to in section 226M(2) may not reflect the risk of credit spread changes appropriately in respect of a
counterparty because the VaR model does not appropriately reflect the specific risk of debt securities issued by the counterparty, the institution must use the standardized CVA method, instead of the advanced CVA method, to calculate the CVA capital charge for that counterparty.
10D. Measures which may be taken by Monetary Authority if authorized institution using IMM(CCR) approach no longer satisfies specified requirements
(1) Where the Monetary Authority determines that an authorized institution which is using the IMM(CCR) approach no longer satisfies one or more of the
requirements specified in Schedule 3A applicable to or in relation to the institution, or that the institution has contravened a condition attached under section 33A(1) or (2) to its IMM(CCR) approval or fails to fully implement the IMM(CCR) approach within the period specified, under section 10B(5), in the IMM(CCR) approval, the Monetary Authority may take one or more of the measures set out in subsections (2) to (6).
(2) The Monetary Authority may, by notice in writing given to the authorized institution, require the institution to-
(a) use the current exposure method or the methods mentioned in section 10A(1)(b), as the case requires, instead of the IMM(CCR) approach to calculate the default risk exposures;
(b) if the institution is using the advanced CVA method to calculate the CVA capital charge for transactions that are covered by the IMM(CCR) approval, use the standardized CVA method instead of the
advanced CVA method to calculate the CVA capital charge,
in respect of the transactions as specified in the notice, beginning on such date, or the occurrence of such event, as specified in the notice.
(3) The Monetary Authority may, by notice in writing given to the authorized institution, require the institution to-
(a) submit to the Monetary Authority a plan, within such period (being a period which is reasonable in all the circumstances of the case) as specified in the notice, which satisfies the Monetary Authority that, if it were implemented by the institution, the institution would cease to fall within subsection (1) within a period which is reasonable in all the
(4) The Monetary Authority may, by notice in writing given to an authorized institution, advise the institution that the Monetary Authority is considering exercising the Monetary Authority’s power under section 97F of the Ordinance to vary any capital requirement rule applicable to the institution;
(5) The Monetary Authority may, by notice in writing given to an authorized institution, require the institution to calculate its default risk exposures by the use of such higher α (within the meaning of section 226D(1)) as specified in the notice.
(6) The Monetary Authority may, by notice in writing given to an authorized institution, require the institution to reduce its counterparty credit risk exposures in such manner, or to adopt such measures, specified in the notice which, in the opinion of the Monetary Authority, will cause the
institution to cease to fall within subsection (1) within a period which is reasonable in all the circumstances of the case, or will otherwise mitigate the effect of the institution falling within that subsection.
(7) An authorized institution must comply with the
requirements of a notice given to it under subsection (2), (3), (5) or (6).
(8) To avoid doubt-
(a) the requirements specified in Schedule 3A are also applicable to and in relation to an authorized
institution using the IMM(CCR) approach in respect of an internal model to which a significant change mentioned in section 10B(8)(a) relates (whether or not the institution has, in respect of that change, been given the prior consent referred to in that section) and the other provisions of this section apply accordingly; and
(b) subsection (4) does not operate to prejudice the generality of the circumstances in respect of which the Monetary Authority may exercise the power under section 97F of the Ordinance in the case of an authorized institution to which that subsection applies.”.
8. Section 15 amended (authorized institution shall only use STC(S) approach