BANKING (CAPITAL) (AMENDMENT) RULES 2012 DRAFT

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DRAFT

BANKING (CAPITAL) (AMENDMENT) RULES 2012

Subject to change

Reference version for consultation only

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BANKING (CAPITAL) (AMENDMENT) RULES 2012

Contents Section

1. Commencement

2. Banking (Capital) Rules amended 3. Section 2 amended (interpretation)

4. Section 4 amended (interpretation of Part 2)

5. Section 4A amended (valuation of exposures measured at fair value)

6. Section 5 amended (authorized institution shall only use STC approach, BSC approach or IRB approach to calculate its credit risk for non-securitization exposures)

7. Sections 10A to 10D added

10A. Authorized institution must only use current exposure method, etc. to calculate counterparty credit risk

10B. Authorized institution may apply for approval to use IMM(CCR) approach to calculate default risk exposures

10C. Provisions supplementary to prescribed methods for calculation of CVA capital charge

10D. Measures which may be taken by Monetary Authority if authorized institution using IMM(CCR) approach no longer satisfies specified requirements

8. Section 15 amended (authorized institution shall only use STC(S) approach or IRB(S) approach to calculate its credit risk for securitization exposures) 9. Part 2, Division 4A added

Division 4A - Calculation of Credit Risk for Exposures to CCPs, etc.

16A. Authorized institution must use Division 4 of Part 6A to calculate credit risk for exposures to CCPs, etc.

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11. Section 33A amended (attachment of conditions to approvals granted under section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a))

12. Section 34 amended (reviewable decisions) 13. Section 51 amended (interpretation of Part 4)

14. Section 52 amended (calculation of risk-weighted amount of exposures)

15. Section 53 amended (on-balance sheet exposures and off-balance sheet exposures to be covered)

16. Section 59 amended (bank exposures)

17. Section 64 amended (regulatory retail exposures) 18. Section 65 amended (residential mortgage loans) 19. Section 69 amended (application of ECAI ratings) 20. Section 70A added

70A. Application of sections 71(2) and (3), 72 and 73(b) and (c)

21. Section 74 amended (determination of risk-weights applicable to off-balance sheet exposures)

22. Section 75 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in banking book)

23. Section 76 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in trading book)

24. Section 76A added

76A. Calculation of risk-weighted amount of default risk exposures in respect of SFTs

25. Section 77 amended (recognized collateral)

26. Section 79 amended (collateral which may be recognized for purposes of section 77(i)(i))

27. Section 80 amended (collateral which may be recognized for purposes of section 77(i)(ii))

28. Section 81 amended (calculation of risk-weighted amount of exposures taking into account credit risk mitigation effect of recognized collateral under simple approach)

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29. Section 82 amended (determination of risk-weight to be allocated to recognized collateral under simple approach)

30. Section 85 amended (calculation of risk-weighted amount of OTC derivative transactions and credit derivative contracts)

31. Section 88 amended (calculation of net credit exposure of off-balance sheet exposures other than credit derivative contracts booked in trading book or OTC derivative transactions)

32. Section 89 amended (calculation of net credit exposure of credit derivative contracts booked in trading book and OTC derivative transactions)

33. Section 91 amended (minimum holding periods)

34. Section 92 amended (adjustment of standard supervisory haircuts in certain circumstances)

93A. Application of sections 95, 96 and 97

36. Section 95 amended (netting of OTC derivative transactions and netting of credit derivative contracts booked in trading book)

37. Section 96 amended (netting of repo-style transactions)

38. Section 97 amended (use of value-at-risk model instead of Formula 9) 39. Section 98 amended (recognized guarantees)

40. Section 99 amended (recognized credit derivative contracts) 41. Section 103 amended (maturity mismatches)

43. Section 106 amended (calculation of risk-weighted amount of exposures) 44. Section 107 amended (on-balance sheet exposures and off-balance sheet

exposures to be covered) 45. Section 117A added

117A. Application of sections 118(2) and (3), 119 and 120(b) and (c)

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47. Section 122 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in banking book)

48. Section 123 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in trading book)

123A. Calculation of risk-weighted amount of default risk exposures in respect of SFTs

50. Section 124 amended (recognized collateral)

51. Section 125 amended (collateral which may be recognized for purposes of section 124(h))

52. Section 126 amended (calculation of risk-weighted amount of exposures taking into account credit risk mitigation effect of recognized collateral)

53. Section 129 amended (calculation of risk-weighted amount of OTC derivative transactions and credit derivative contracts)

130A. Application of section 131

55. Section 131 amended (netting of OTC derivative transactions and netting of credit derivative contracts booked in trading book)

56. Section 137 amended (maturity mismatches) 57. Section 139 amended (interpretation of Part 6)

58. Section 140 amended (calculation of risk-weighted amount of exposures) 59. Section 140A amended (calculation of exposure at default)

60. Section 141 amended (exposures to be covered) 61. Section 149 amended (default of obligor)

62. Section 153 amended (rating assignment horizon) 63. Section 154 amended (rating coverage)

64. Section 156 amended (calculation of risk-weighted amount of corporate, sovereign and bank exposures)

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“157A. Provisions supplementary to section 156(2) and (5) - asset value correlation multiplier for exposures to certain financial institutions or financial groups

66. Section 158 amended (provisions supplementary to section 156 - risk-weights for specialized lending)

67. Section 160 amended (loss given default under foundation IRB approach) 68. Section 161 amended (loss given default under advanced IRB approach) 69. Section 164A added

164A. Application of sections 165 and 166(b) and (c)

70. Section 168 amended (maternity under advanced IRB approach) 71. Section 180A added

180A. Application of sections 181 and 182(b) and (c)

72. Section 191 amended (PD/LGD approach - rating assignment horizon)

73. Section 194 amended (PD/LGD approach - calculation of risk-weighted amount of equity exposures)

74. Section 202 substituted

202. Securities financing transactions

75. Section 203 amended (credit risk mitigation - general) 76. Section 209 amended (recognized netting)

77. Section 211 amended (recognized guarantees and recognized credit derivative contracts under substitution framework for corporate, sovereign and bank exposures under foundation IRB approach and for equity exposures under PD/LGD approach)

78. Section 216 amended (provisions supplementary to section 214(1) - substitution framework for corporate, sovereign and bank exposures under foundation IRB approach and for equity exposures under PD/LGD approach)

79. Section 217 amended (provisions supplementary to section 214(1) - substitution

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80. Section 224 amended (application of scaling factor) 81. Section 226 amended (calculation of capital floor) 82. Part 6A added

Part 6A

Calculation of Counterparty Credit Risk Division 1 - General

226A. Interpretation of Part 6A

Division 2 - IMM(CCR) Approach 226B. Application of Division 2

226C. Calculation of IMM(CCR) risk-weighted amount at portfolio level under IMM(CCR) approach

226D. Calculation of default risk exposure at netting set level under IMM(CCR) approach

226E. Calculation of Effective EPE 226F. Calculation of Effective EE 226G. Calculation of EE

226H. Treatments for certain credit derivative contracts

226I. Treatments for transactions with specific wrong-way risk 226J. Treatments of margin agreements

226K. Shortcut method 226L. Margin period of risk

Division 3 - Calculation of CVA capital charge 226M. Advanced CVA method

226N. Specific requirements relating to VaR under advanced CVA method 226O. Standardized CVA method

226P. Eligible CVA hedges

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83. Part 6A, Division 4 added

Division 4 - Exposures to CCPs 226Q. Application of Division 4

226R. Interpretation - Division 4

226S. Calculation of default risk exposures

226T. Exposures of clearing members to qualifying CCPs 226U. Exposures of clearing members to clients

226V. Exposures of clients to clearing members 226W. Exposures of clients to qualifying CCPs 226X. CCP ceases to be qualifying CCP 226Y. Exposures to non-qualifying CCPs 226Z. Treatment of posted collateral

85. Section 232 amended (provisions applicable to ECAI issue specific ratings in addition to those applicable under Part 4)

232A. Recognized guarantees and recognized credit derivative contracts 87. Section 265 amended (recognized credit risk mitigation)

88. Section 272 amended (credit enhancement level of tranche) 89. Section 273 amended (thickness of tranche)

90. Section 278 amended (treatment of recognized credit risk mitigation - full credit protection)

91. Section 279 amended (treatment of recognized credit risk mitigation - partial credit protection)

92. Section 283 amended (positions to be used to calculate market risk)

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94. Section 313 amended (counterparty credit risk)

95. Section 316 amended (positions to be used to calculate market risk)

96. Section 318 amended (capital treatment for trading book positions subject to incremental risk charge or comprehensive risk charge)

97. Section 321 amended (counterparty credit risk)

98. Schedule 1 amended (specifications for purposes of certain definitions in section 2(1) of these Rules)

99. Schedule 3 amended (minimum requirements to be satisfied for approval under section 18 of these Rules to use IMM approach)

100. Schedule 3A added

Schedule 3A

Minimum Requirements to be satisfied for Approval under section 10B(2)(a) to use IMM(CCR) Approach

101. Schedule 6 amended (credit quality grades)

102. Schedule 7 amended (standard supervisory haircuts for comprehensive approach to treatment of recognized collateral)

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BANKING (CAPITAL) (AMENDMENT) RULES 2012

(Made by the Monetary Authority under section 97C of the Banking Ordinance (Cap. 155) after consultation with the Financial Secretary, the Banking Advisory Committee, the Deposit-taking Companies Advisory Committee, The Hong Kong Association of Banks

and The DTC Association)

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1. Commencement

(1) Subject to subsection (2), these Rules come into operation on 1 January 2013.

(2) Sections 3(11) to (15), 4, 6, 8, 9, 14(2), 15(1) and (3), 43(2), 44(1) and (3), 58(2), 60(1) and (3), 81 and 83 come into operation on […]¹.

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2. Banking (Capital) Rules amended

The Banking (Capital) Rules (Cap. 155 sub. leg.L) are amended as set out in sections 3 to 100.

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3. Section 2 amended (interpretation) (1) Section 2(1)-

Repeal the definition of back-testing Substitute

“back-testing ( )-

(a) subject to paragraph (b), in relation to the use of an internal model by an authorized institution, means a process

whereby the daily changes in the value of a portfolio of exposures of the institution are compared with the daily VaR generated from the institution’s internal model applicable to that portfolio; or

(b) in relation to the use of an internal model by an authorized institution to calculate counterparty credit risk, means a process whereby the realized values of risk measures and the hypothetical changes based on static positions are compared to the values of the risk measures forecast by the model;”.

(2) Section 2(1)-

Repeal the definition of credit derivative contract Substitute

“credit derivative contract ( ) means-

(a) a forward contract, swap contract, option contract or similar derivative contract entered into by 2 parties with the

intention to transfer credit risk in relation to a reference obligation from one party (protection buyer) to the other party (protection seller); or

(b) a long settlement transaction-

(i) that falls within paragraph (a); or

(ii) of which the counterparty credit risk profile is similar to that of a contract that falls within paragraph (a);”.

(3) Section 2(1), definition of derivative contract, after paragraph (b)- Add

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“(c) means a long settlement transaction- (i) that falls within paragraph (a); or

(ii) of which the counterparty credit risk profile is similar to that of a contract that falls within paragraph (a);”.

(4) Section 2(1), definition of long-term ECAI issue specific rating, paragraphs (a) and (b)-

Repeal

“79(e)”

Substitute

“79(1)(e)”.

(5) Section 2(1)-

Repeal the definition of nettable Substitute

“nettable ( ), in relation to an exposure (however described) of an authorized institution, means that the exposure is-

(a) subject to paragraph (b), subject to a valid bilateral netting agreement;

(b) in the case of the calculation of default risk exposure using the IMM(CCR) approach, subject to a valid bilateral netting agreement or a valid cross-product netting agreement;”.

(6) Section 2(1)-

Repeal the definition of potential exposure Substitute

“potential exposure ( ), in relation to the current exposure method, means the principal amount (within the meaning of section 51(1), 105, 139(1) or 227(1), as the case requires) of a transaction or contract multiplied by the applicable CCF;”.

(7) Section 2(1), definition of recognized credit risk mitigation-

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Substitute

“(c) a recognized guarantee (within the meaning of section 51(1), 105 or 139(1), as the case requires);

(d) a recognized credit derivative contract (within the meaning of section 51(1), 105 or 139(1), as the case requires); or

(e) collateral that falls within section 226G(3),”.

(8) Section 2(1)-

Repeal the definition of recognized netting Substitute

“recognized netting ( ) means any netting done pursuant to- (a) a valid bilateral netting agreement; or

(b) in the case of the calculation of default risk exposure using the IMM(CCR) approach-

(i) a valid bilateral netting agreement; or (ii) a valid cross-product netting agreement;”.

(9) Section 2(1), definition of short-term ECAI issue specific rating, paragraphs (a) and (b)-

Repeal

“79(k)”

Substitute

“79(1)(k)”.

(10) Section 2(1)-

Add in alphabetical order

“advanced CVA method ( ) has the meaning given by section 226A(1);

CCP ( ) means a central counterparty;

CEM ( ) means the current exposure method;

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CEM risk-weighted amount ( ), in relation to derivative contracts entered into by an authorized institution, means the sum of the default risk risk-weighted amounts for all the counterparties to the contracts where the default risk risk-weighted amount for each of the counterparties is calculated as the product of- (a) the outstanding default risk exposure to the counterparty

calculated by using the current exposure method; and (b) the risk-weight applicable to the default risk exposure

determined under-

(i) the BSC approach;

(ii) the STC approach; or (iii) the IRB approach, as the case requires;

central counterparty ( ), in relation to a portfolio of contracts traded in one or more financial markets, means a person who-

(a) interposes between the counterparties to the contracts by becoming the buyer to every seller and the seller to every buyer under the contracts; and

(b) is responsible for the operation of a clearing system;

counterparty credit risk ( ) means-

(a) the counterparty default risk; and (b) the CVA risk;

counterparty default risk ( ), in relation to a derivative contract or securities financing transaction entered into by an authorized institution with a counterparty, means the risk that the counterparty could default before the final settlement of the cash flows of the contract or transaction, as the case may be;

credit valuation adjustment ( ), in relation to the

calculation by an authorized institution of counterparty credit risk in respect of a counterparty, means an adjustment made by the institution to the valuation of a netting set with the counterparty to

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credit valuation adjustment capital charge ( ), in relation to the calculation by an authorized institution of counterparty credit risk in respect of a counterparty, means the amount of regulatory capital that the institution is required to hold for the CVA risk of the counterparty;

current exposure method ( )-

(a) in relation to an off-balance sheet exposure to a

counterparty under an OTC derivative transaction or credit derivative contract that is not covered by a valid bilateral netting agreement, means the method set out in section 71(2), 73, 118(2), 120, 165, 166, 181 or 182, as the case requires, for calculating the credit equivalent amount of the exposure;

(b) in relation to an off-balance sheet exposure that is a net credit exposure to a counterparty arising from a portfolio of OTC derivative transactions or credit derivative contracts covered by a valid bilateral netting agreement, means the method set out in section 95, 131 or 209(2), as the case requires, for calculating the credit equivalent amount of the exposure;

CVA ( ) means a credit valuation adjustment;

CVA capital charge ( ) means a credit valuation adjustment capital charge;

CVA loss ( ), in relation to the calculation by an authorized institution of the outstanding default risk exposure to a

counterparty, means the CVA (or a portion thereof) for the counterparty that has been recognized by the institution as an incurred write-down, where the amount of the incurred write-down is calculated-

(a) without taking into account any offsetting debit valuation adjustments that have been deducted from the capital base of the institution under section [..]²; and

(b) net of any debit valuation adjustments that have not been deducted from the capital base of the institution;

CVA risk ( ) has the meaning given by section 226A(1);

2 The section is for the implementation of paragraph 75 of the Basel III framework and the contents of the section will be included in the 2^nd batch of amendment rules for implementation of revised definition of

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CVA risk-weighted amount ( ), in relation to an authorized institution and the CVA capital charge for a counterparty, means that amount calculated by the institution by multiplying the CVA capital charge by 12.5;

default risk exposure ( ), in relation to the calculation by an authorized institution of counterparty credit risk in respect of a netting set with a counterparty, means the institution’s exposure to the counterparty default risk of the counterparty and-

(a) subject to paragraphs (b) and (e), if the netting set falls within paragraph (b) of the definition of netting set in section 226A(1) and the transaction concerned is an OTC derivative transaction or credit derivative contract, the amount of that exposure is the credit equivalent amount (within the meaning of section 51(1), 105, 139(1) or 227(1), as the case requires) calculated using the current exposure method;

(b) subject to paragraph (e), if the netting set falls within [paragraph (a)] of the definition of netting set in section 226A(1) and the transactions [within the netting set] OR [concerned] are OTC derivative transactions or credit derivative contracts, the amount of that exposure is the credit equivalent amount of net credit exposure (in the case of section 95 or 131, as the case requires) or the EAD (in the case of section 209(2)), as the case may be, calculated using the current exposure method;

(c) subject to paragraphs (d) and (e), if the netting set falls within paragraph (b) of the definition of netting set in section 226A(1) and the transaction concerned is an SFT, the amount of that exposure is the principal amount of securities sold or lent, or the money paid or lent, or the securities or money provided as collateral, as the case requires, under the SFT;

(d) subject to paragraph (e), if the netting set falls within paragraph (a) of the definition of netting set in section 226A(1) and the transactions within the netting set are SFTs, the amount of that exposure is the net credit exposure of the SFTs calculated under section 96, 97 or 209(3), as the case requires; and

(e) if the netting set is covered by an IMM(CCR) approval, the

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IMM(CCR) approach ( ) means the internal model (counterparty credit risk) approach;

IMM(CCR) approval ( ) means an approval to use the IMM (CCR) approach granted by the Monetary Authority under section 10B(2)(a);

IMM(CCR) risk-weighted amount ( ) means the amount calculated under section 226C;

internal model (counterparty credit risk) approach ( ) means the method of calculating an authorized institution’s default risk exposure set out in Division 2 of Part 6A;

long settlement transaction ( ), in relation to the

calculation by an authorized institution of counterparty credit risk, means a transaction where a counterparty undertakes to deliver a security, commodity or foreign currency amount against cash, other financial instruments or commodities, or vice versa, at a settlement or delivery date that is [contractually] specified [in the transaction] as being more than the lower of-

(a) the market standard applicable to a transaction of this type;

or

(b) 5 business days after the date on which the institution enters into the transaction;

margin agreement ( ) has the meaning given by section 226A(1);

margin lending transaction ( ), in relation to the

calculation of counterparty credit risk by an authorized institution- (a) subject to paragraph (b), means a transaction under which a

person extends credit in connection with the purchase, sale, carrying or trading of securities; and

(b) excludes a transaction under which the credit extended is- (i) secured by securities; and

(ii) in connection with a matter other than the purchase, sale, carrying or trading of securities;

margin period of risk ( ) has the meaning given by section 226A(1);

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minimum transfer amount ( ) has the meaning given by section 226A(1);

netting set ( ) has the meaning given by section 226A(1);

outstanding default risk exposure ( ), in relation to a counterparty with whom the transactions entered into by an authorized institution consist of not less than one OTC derivative transaction or credit derivative contract, means the greater of- (a) zero; and

(b) the difference between-

(i) the sum of default risk exposures across all netting sets with the counterparty; and

(ii) the CVA loss in respect of that counterparty;

securities financing transaction ( ) means-

(a) a repo-style transaction;

(b) a margin lending transaction;

(c) a long settlement transaction that falls within paragraph (a) or (b); or

(d) a long settlement transaction of which the counterparty credit risk profile is similar to that of a transaction that falls within paragraph (a) or (b);

SFT ( ) means a securities financing transaction;

specific wrong-way risk ( ) has the meaning given by section 226A(1);

standardized CVA method ( ) has the meaning given by section 226A(1);

threshold ( ) has the meaning given by section 226A(1);

valid cross-product netting agreement ( ), in relation to an authorized institution’s transactions that are covered by an

IMM(CCR) approval, has the meaning given by section 226A(2);”.

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“(g) if the netting set consists of one or more than one derivative

contract (other than a credit derivative contract) that is traded on an exchange, the amount of that exposure is the amount mentioned in paragraph (a), (b) or (e), as the case may be, as if the transaction were an OTC derivative transaction;”.

(12) Section 2(1)-

Repeal the definition of over-the-counter derivative transaction Substitute

“over-the-counter derivative transaction ( ) means a derivative contract (other than a credit derivative contract) that is not traded on an exchange;”.

(13) Section 2(1), definition of risk-weighted amount, paragraph (a), after “or 6,”-

Add

“or Division 4 of Part 6A,”.

(14) Section 2(1), definition of risk-weighted amount for credit risk, paragraph (a), after “or 6,”-

Add

“or Division 4 of Part 6A,”.

(15) Section 2(1)-

“CCP-related transaction ( ), in relation to a CCP, means a derivative contract or SFT between a clearing member of the CCP and the clearing member’s client that is directly related to a derivative contract or SFT between the clearing member and the CCP;

clearing member ( ) means any of the following- (a) a member of, or a direct participant in, a CCP that is

entitled to enter into a transaction with the CCP;

(b) a CCP to which the CCP mentioned in paragraph (a) has a link;

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client ( ), in relation to a clearing member of a CCP, means a party to a transaction with the CCP through the clearing member- (a) acting as a financial intermediary; or

(b) guaranteeing the performance of the party to the CCP;

default fund contribution ( ), in relation to a clearing member of a CCP, means-

(a) the funded or unfunded contribution made by the clearing member to the CCP’s mutualized loss-sharing

arrangements; or

(b) the clearing member’s underwriting of the CCP’s mutualized loss-sharing arrangements;”.

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4. Section 4 amended (interpretation of Part 2)

Section 4, definition of IRB coverage ratio, after “institution’s risk-weighted amount for credit risk”-

Add

“(but excluding any risk-weighted amount for credit risk of its exposures to a CCP that is subject to Division 4 of Part 6A)”.

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5. Section 4A amended (valuation of exposures measured at fair value) Section 4A(1), after “Part 4, 5, 6,”-

Add

“6A,”.

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6. Section 5 amended (authorized institution shall only use STC approach, BSC approach or IRB approach to calculate its credit risk for non-securitization exposures)

Section 5(1)- Repeal

“An authorized institution”

Substitute

“Subject to section 16A, an authorized institution”.

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7. Sections 10A to 10D added After section 10-

Add

“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.

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(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.

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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

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(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.

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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

(31)

(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.”.

(32)

8. Section 15 amended (authorized institution shall only use STC(S) approach or IRB(S) approach to calculate its credit risk for securitization exposures) Section 15(1)-

Repeal

“section 16”

Substitute

“sections 16 and 16A”.

(33)

9. Part 2, Division 4A added

“Division 4A - Calculation of Credit Risk for Exposures to CCPs, etc.

16A. Authorized institution must use Division 4 of Part 6A to calculate credit risk for exposures to CCPs, etc.

An authorized institution must calculate-

(a) its credit risk for exposures to CCPs in respect of derivative contracts and SFTs cleared by the CCPs and default fund contributions; and

(b) its credit risk for exposures to clearing members and clients in respect of CCP-related transactions and guarantees of clients’ performances,

in accordance with Division 4 of Part 6A.”.

(34)

10. Part 2, Division 7A, heading amended (attachment of conditions to approvals granted under section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a))

Part 2, Division 7A, heading, after “8(2)(a),”- Add

“10B(2)(a),”.

(35)

11. Section 33A amended (attachment of conditions to approvals granted under section 6(2)(a), 8(2)(a), 18(2)(a), 20(2)(a) or 25(2)(a))

(1) Section 33A, heading, after “8(2)(a),”- Add

“10B(2)(a),”.

(2) Section 33A(1), after “8(2)(a),”- Add

“10B(2)(a),”.

(3) Section 33A(2), after “8(2)(a),”- Add

“10B(2)(a),”.

(36)

12. Section 34 amended (reviewable decisions) Section 34(1), after “8(2),”-

Add

“10B(2),”.

(37)

13. Section 51 amended (interpretation of Part 4)

(1) Section 51(1), definition of principal amount, paragraph (b), after subparagraph (iv)-

Add

“(v) in the case of an exposure to a person arising from the person holding collateral posted by the institution in a manner that is not bankruptcy remote from the person, the fair value of the

collateral;”.

(2) Section 51(1)-

“SFT risk-weighted amount ( ), in relation to [a portfolio of] SFTs, means the sum of the default risk risk-weighted amounts for all counterparties to the SFTs where the default risk risk- weighted amount for each of the counterparties is calculated as the product of-

(a) the sum of default risk exposures across all the SFTs with the counterparty calculated under section 76A(3) to (6), 96 or 97, as the case requires; and

(b) the risk-weight applicable to the exposures determined under section 74(1);”.

(38)

14. Section 52 amended (calculation of risk-weighted amount of exposures) (1) Section 52(3)-

Repeal paragraph (a) Substitute

“(a) subject to paragraph (b), in the case of an authorized institution’s off-balance sheet exposures that are counterparty credit risk exposures to OTC derivative transactions, credit derivative contracts or SFTs-

(i) the institution must, if it has an IMM(CCR) approval and an approval to use the IMM approach to calculate specific risk for interest rate exposures, calculate the risk-weighted amount of those off-balance sheet exposures as the sum of- (A) the IMM(CCR) risk-weighted amount of the

transactions concerned that are covered by the IMM(CCR) approval;

(B) the CEM risk-weighted amount or SFT risk- weighted amount, as the case may be, of the

transactions concerned that are not [covered] by the IMM(CCR) approval or that fall within section 10B(5) or (6); and

(C) the CVA risk-weighted amount determined using the advanced CVA method, the standardized CVA method, or a combination of those 2 methods that is permitted under these Rules, as the case requires;

(ii) the institution must, if it has an IMM(CCR) approval but does not have an approval to use the IMM approach to calculate specific risk for interest rate exposures, calculate the risk-weighted amount of those off-balance sheet exposures as the sum of-

(A) the IMM(CCR) risk-weighted amount of the transactions concerned that are covered by the IMM(CCR) approval;

(B) the CEM risk-weighted amount or SFT risk- weighted amount, as the case may be, of the

(39)

(C) the CVA risk-weighted amount determined using the standardized CVA method;

(iii) the institution must, if it does not have an IMM(CCR) approval for any of its transactions, calculate the risk- weighted amount of those off-balance sheet exposures as the sum of-

(A) the CEM risk-weighted amount;

(B) the SFT risk-weighted amount; and

(C) the CVA risk-weighted amount determined using the standardized CVA method;

(aa) an authorized institution is not required to hold regulatory capital for CVA risk in respect of transactions with a CCP;

(ab) subject to paragraph (b), in the case of an authorized institution’s off-balance sheet exposures that do not fall within paragraph (a), the institution must calculate the risk-weighted amount of each of those exposures by-

(i) converting the principal amount of the exposure, net of specific provisions, into its credit equivalent amount in the manner set out in section 71 or 73, as the case requires; and (ii) multiplying the credit equivalent amount by the exposure’s

relevant risk-weight determined under section 74;”.

(2) Section 52(3)-

Repeal paragraph (aa).

(3) Section 52(3)(b)- Repeal

“paragraph (c)”

Substitute

“paragraphs (c) and (d)”.

(4) Section 52(3)(c)- Repeal

“that rating.”

(40)

Substitute

“that rating;”.

(5) After section 52(3)(c)- Add

“(d) where an off-balance sheet exposure of an authorized institution is a counterparty credit risk exposure to OTC derivative transactions, credit derivative contracts or SFTs, the institution must not, under paragraph (b), take into account the effect of any recognized credit risk mitigation applicable to the exposure if that effect has already been taken into account in the calculation of the default risk exposures in respect of those transactions or contracts, as the case may be.”.

(6) After section 52(3)- Add

“(3A) For the purposes of subsection (1), where an authorized institution has bought credit protection for an exposure and the credit

protection is in the form of a single-name credit default swap which falls within section 226I(1), the institution must not take into account the credit mitigation effect of the swap when calculating the risk-weighted amount of the exposure.”.

(41)

15. Section 53 amended (on-balance sheet exposures and off-balance sheet exposures to be covered)

(1) Section 53(a)-

Repeal subparagraph (ii) Substitute

“(ii) which are subject to the requirements of Part 7; or

(iii) which are subject to the requirements of Division 4 of Part 6A;”.

(2) Section 53-

Repeal paragraph (b) Substitute

“(b) all the institution’s exposures to counterparties-

(i) under OTC derivative transactions, credit derivative contracts or SFTs booked in its trading book; or

(ii) in respect of assets posted by the institution as collateral that are held by the counterparties in a manner that is not bankruptcy remote from the counterparties,

except such exposures that are subject to deduction from any of the institution’s CET1 capital, additional Tier 1 capital and Tier 2 capital under [Division …of Part …]³; and”.

(3) Section 53(b), after “trading book”- Add

“except such exposures which are subject to the requirements of Division 4 of Part 6A”.

3 The contents of the Division will be included in the 2^nd batch of amendment rules for implementation of

(42)

16. Section 59 amended (bank exposures) (1) Section 59(5)-

Repeal

“Where”

Substitute

“Subject to subsection (5A), where”.

“(5A) Subsection (5) does not apply to an exposure of the authorized institution to a bank in respect of a self-liquidating letter of credit that-

(a) is issued by the bank;

(b) has a maturity of less than one year; and (c) has been confirmed by the institution.”.

(43)

17. Section 64 amended (regulatory retail exposures) Section 64(2)(a)-

Repeal subparagraph (ii) Substitute

“(ii) in the case of an off-balance sheet exposure which is an OTC derivative transaction, credit derivative contract or SFT, the amount of the exposure is-

(A) the outstanding default risk exposure in respect of the OTC derivative transaction or credit derivative contract; or (B) the default risk exposure in respect of the SFT, as the case requires; and”.

(44)

18. Section 65 amended (residential mortgage loans) Section 65(6)(b)(iii)-

Repeal

“section 79(a)”

Substitute

“section 79(1)(a)”.

(45)

19. Section 69 amended (application of ECAI ratings) Section 69-

Repeal subsections (3) and (4) Substitute

“(3) Subject to subsections (5) and (8), where-

(a) an exposure (however described) of an authorized

institution which falls within any subsection of section 55, 57, 59, 60 or 61 does not have an ECAI issue specific rating;

(b) the person to whom the institution has the exposure has a long-term ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person; and (c) the person to whom the institution has the exposure does

not have an ECAI issuer rating,

the institution must, in complying with the requirements under that subsection of section 55, 57, 59, 60 or 61, as the case may be, in relation to the exposure-

(d) use the long-term ECAI issue specific rating mentioned in paragraph (b) if-

(i) the use of that long-term ECAI issue specific rating by the institution would result in the allocation by the institution of a risk-weight to the exposure which would be equal to, or higher than, the risk- weight allocated by the institution to the exposure on the basis that the person has neither an ECAI issuer rating nor an ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person; and

(ii) the exposure ranks equally with, or is subordinated in respect of payment or repayment to, the debt obligation mentioned in paragraph (b);

(e) use the long-term ECAI issue specific rating mentioned in paragraph (b) if-

(i) the use of that long-term ECAI issue specific rating by the institution would result in the allocation by

(46)

the institution of a risk-weight to the exposure which would be lower than the risk-weight allocated by the institution to the exposure on the basis that the person has neither an ECAI issuer rating nor an ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person; and (ii) the exposure ranks equally with, or senior in respect

of payment or repayment to, the debt obligation mentioned in paragraph (b).

(4) Subject to subsections (5) and (8), where-

(a) an exposure (however described) of an authorized

institution which falls within any subsection of section 55, 57, 59, 60 or 61 does not have an ECAI issue specific rating;

(b) the person to whom the institution has the exposure has an ECAI issuer rating; and

(c) the person to whom the institution has the exposure does not have a long-term ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person, the institution must, in complying with the requirements under that subsection of section 55, 57, 59, 60 or 61, as the case may be, in relation to the exposure-

(d) use the ECAI issuer rating mentioned in paragraph (b) if- (i) the use of that ECAI issuer rating by the institution

would result in the allocation by the institution of a risk-weight to the exposure which would be equal to, or higher than, the risk-weight allocated by the institution to the exposure on the basis that the person has neither an ECAI issuer rating nor an ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person;

(ii) that ECAI issuer rating is only applicable to unsecured exposures to the person as an issuer which are not subordinated to other exposures to that person; and

(47)

(e) use the ECAI issuer rating mentioned in paragraph (b) if- (i) the use of that ECAI issuer rating by the institution

would result in the allocation by the institution of a risk-weight to the exposure which would be lower than the risk-weight allocated by the institution to the exposure on the basis that the person has neither an ECAI issuer rating nor an ECAI issue specific rating assigned to a debt obligation issued or undertaken by the person;

(ii) that ECAI issuer rating is only applicable to unsecured exposures to the person as an issuer which are not subordinated to other exposures to that person; and

(iii) the exposure to the person is not subordinated to other exposures to the person as an issuer.”.

(48)

20. Section 70A added

Part 4, Division 4, before section 71- Add

“70A. Application of sections 71(2) and (3), 72 and 73(b) and (c) Sections 71(2) and (3), 72 and 73(b) and (c) do not apply to OTC derivative transactions or credit derivative contracts for which an authorized institution has an IMM(CCR) approval except for such transactions or contracts for which the institution is permitted, under section 10B(5) or (6), to use the current exposure method.”.

(49)

21. Section 74 amended (determination of risk-weights applicable to off-balance sheet exposures)

(1) Section 74(1)- Repeal

“subsection (2)”

Substitute

“subsections (2) and (6A)”.

“(6A) Where an off-balance sheet exposure mentioned in subsection (1) of an authorized institution is a single-name credit default swap which falls within section 226I(1) and the default risk exposure in respect of the swap is determined in accordance with section 226I(3), the institution must determine the risk-weight attributable to the exposure by reference to the attributed risk-weight of the counterparty in respect of the swap without taking into account any recognized credit risk mitigation afforded to the swap.”.

(50)

22. Section 75 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in banking book)

(1) Section 75, heading- Repeal

“repo-style transactions”

Substitute

“assets underlying SFTs”.

(2) Section 75(1)-

Repeal subsection (1) Substitute

“(1) An authorized institution must calculate the risk-weighted amount of an exposure in respect of the asset underlying an SFT booked in its banking book in accordance with the following provisions.”.

“Where the repo-style transaction”

Substitute

“Where the SFT is a repo-style transaction that”.

(4) Section 75-

Repeal subsection (3).

“Where the repo-style transaction”

Substitute

“Where the SFT is a repo-style transaction that”.

(51)

(6) Section 75(4)-

Repeal paragraph (a).

“(5) Where the asset underlying an SFT is a securitization issue, an authorized institution must determine the risk-weight attributable to the asset in accordance with Part 7.”.

(52)

23. Section 76 amended (calculation of risk-weighted amount of exposures in respect of repo-style transactions booked in trading book)

“repo-style transactions”

Substitute

“assets underlying SFTs”.

(2) Section 76- Repeal

“in respect of a repo-style transaction”

Substitute

“in respect of the asset underlying an SFT”.

(3) Section 76-

Repeal paragraph (b).

(53)

24. Section 76A added After section 76-

Add

“76A. Calculation of risk-weighted amount of default risk exposures in respect of SFTs

(1) Subject to subsection (2), an authorized institution that has an IMM(CCR) approval for SFTs must calculate the risk- weighted amount of its default risk exposures in respect of SFTs (whether booked in its banking book or trading book) using the IMM(CCR) approach.

(2) Where-

(a) an authorized institution does not have an IMM(CCR) approval for SFTs;

(b) an authorized institution has an IMM(CCR) approval for SFTs that does not include SFTs that are long settlement transactions; or

(c) an authorized institution is permitted, under section 10B(5) or (6), not to use the IMM(CCR) approach for certain SFTs,

the institution must calculate the risk-weighted amount of its default risk exposures in respect of SFTs (whether booked in its banking book or trading book) that are not, by virtue of the circumstance mentioned in paragraph (a), (b) or (c), subject to the IMM(CCR) approach, in accordance with subsections (3) to (6).

(3) Where the SFT is a repo-style transaction that falls within paragraph (a) or (b) of the definition of repo-style

transaction in section 2(1), the authorized institution must treat the securities sold or lent under the transaction as an on-balance sheet exposure to the counterparty secured on the money or securities which are provided to, or to the order of, the institution under the transaction and, accordingly, calculate the risk-weighted amount of the institution’s default risk exposure in respect of the

transaction by reference to the attributed risk-weight of the counterparty subject to the application of any recognized credit risk mitigation applicable to the transaction.

(54)

(4) Where the SFT is a repo-style transaction that falls within paragraph (c) of the definition of repo-style transaction in section 2(1), the authorized institution must treat the money paid by the institution under the transaction as a loan to the counterparty secured on the securities which are provided to, or to the order of, the institution under the transaction and, accordingly, calculate the risk-weighted amount of the institution’s default risk exposure in respect of the

(5) Where the SFT is a margin lending transaction, the authorized institution must calculate the risk-weighted amount of its default risk exposure in respect of the

(6) Where the SFT is a repo-style transaction that falls within paragraph (d) of the definition of repo-style transaction in section 2(1)-

(a) if and to the extent that the authorized institution has provided collateral in the form of money under the transaction, the institution must treat the money paid by the institution under the transaction as a loan to the counterparty secured on the securities borrowed by the institution and, accordingly, calculate the risk-weighted amount of the

institution’s default risk exposure in respect of the transaction by reference to the attributed risk-weight of the counterparty subject to the application of any recognized credit risk mitigation applicable to the transaction;

(b) if and to the extent that the authorized institution has provided collateral in the form of securities under the transaction, the institution must treat those securities as an on-balance sheet exposure to the counterparty secured on the securities borrowed by the institution and, accordingly, calculate the risk- weighted amount of its default risk exposure in respect of the transaction by reference to the attributed risk-weight of the counterparty subject to

(55)

25. Section 77 amended (recognized collateral) (1) Section 77, after paragraph (e)-

Add

“(ea) if the collateral is provided under a margin agreement for OTC derivative transactions, credit derivative contracts or SFTs, the institution has-

(i) devoted sufficient resources to enable the orderly operation of the agreement; and

(ii) has collateral management policies in place to control, monitor and report-

(A) risks (including liquidity risk and concentration risk) associated with the agreement;

(B) reuse of collateral; and

(C) the rights ceded by the institution in respect of collateral posted;”.

(2) Section 77(f)- Repeal

“such that the current market value of the collateral would be likely to fall in the case of any material deterioration in the financial condition of the obligor”.

(3) Section 77(i)(i)- Repeal

“section 79(a)”

Substitute

(4) Section 77(i)(ii)- Repeal

“section 80(a)”

(56)

Substitute

(57)

26. Section 79 amended (collateral which may be recognized for purposes of section 77(i)(i))

(1) Section 79-

Renumber the section as section 79(1).

“For the purposes of”

Substitute

“Subject to subsection (2), for the purposes of”.

“(2) Any reference to debt securities in subsection (1) does not include debt securities which, if being treated as an on-balance sheet exposure of an authorized institution, would fall within the definition of re-securitization exposure in section 227(1).”.

(58)

27. Section 80 amended (collateral which may be recognized for purposes of section 77(i)(ii))

(1) Section 80-

“For the purposes of”

Substitute

“Subject to subsection (2), for the purposes of”.

(3) Section 80(1)(a)- Repeal

“section 79(a)”

Substitute

“section 79(1)(a)”

“(2) Collateral mentioned in subsection (1) does not include debt securities which, if being treated as an on-balance sheet exposure of an authorized institution, would fall within the definition of re- securitization exposure in section 227(1).”.

(59)

28. Section 81 amended (calculation of risk-weighted amount of exposures taking into account credit risk mitigation effect of recognized collateral under simple approach)

Section 81(2)(a)- Repeal

“section 79(a)”

Substitute

(60)

29. Section 82 amended (determination of risk-weight to be allocated to recognized collateral under simple approach)

Section 82(5), definition of cash, paragraph (b)- Repeal

“section 79(a)”

Substitute

(61)

30. Section 85 amended (calculation of risk-weighted amount of OTC derivative transactions and credit derivative contracts)

Section 85(1)-

Repeal paragraphs (a) to (d) Substitute

“(a) dividing the outstanding default risk exposure of the transaction, net of specific provisions, into-

(i) the credit protection covered portion; and (ii) the credit protection uncovered portion;

(b) multiplying the credit protection covered portion by the risk- weight attributable to the recognized collateral and multiplying the credit protection uncovered portion by the risk-weight attributable to the exposure; and

(c) adding together the 2 products derived from the application of paragraph (b).”.

(62)

31. Section 88 amended (calculation of net credit exposure of off-balance sheet exposures other than credit derivative contracts booked in trading book or OTC derivative transactions)

“booked in trading book”.

“booked in the trading book of the institution”.

(3) Section 88, Formula 3, heading- Repeal

“BOOKED IN THE TRADING BOOK”.

(63)

32. Section 89 amended (calculation of net credit exposure of credit derivative contracts booked in trading book and OTC derivative transactions) (1) Section 89, heading-

Repeal

“booked in the trading book of the institution”.

(3) Section 89, Formula 4, heading- Repeal

“BOOKED IN TRADING BOOK”.

(4) Section 89, Formula 4, component E- Repeal

“credit equivalent amount of off-balance sheet exposure (calculated by aggregating the potential exposure and current exposure in respect of the credit derivative contract or OTC derivative transaction, as the case may be) net of specific provisions, if any;”

Substitute

“outstanding default risk exposure of the contract or transaction, as the case may be, net of specific provisions, if any;”.

(64)

33. Section 91 amended (minimum holding periods) (1) Section 91-

“(2) Where the exposure mentioned in subsection (1) arises from a transaction or netting set that falls within any of the descriptions in section 226L(2), (3) or (5), the assumed minimum holding period of the transaction or netting set must be equal to the longer margin period of risk that would apply to the transaction or netting set under section 226L(2), (3) or (5), as the case requires.”.

(65)

34. Section 92 amended (adjustment of standard supervisory haircuts in certain circumstances)

Section 92, Formula 6, symbol TM- Repeal

“as set out in Table 12”

Substitute

“determined in accordance with section 91”.

(66)

35. Section 93A added

Part 4, Division 8, before section 94- Add

“93A. Application of sections 95, 96 and 97

(1) Where an authorized institution uses the IMM(CCR) approach to calculate the default risk exposure of a netting set that contains OTC derivative transactions or credit derivative contracts- (a) subject to paragraph (b), the institution must take into

account the effect of any recognized netting in the manner [set out] OR [mentioned] in Part 6A instead of in the manner [set out] OR [mentioned] in section 95;

(b) paragraph (a) does not apply in the case of transactions or contracts for which the institution is permitted, under section 10B(5) or (6), to use the current exposure method.

(2) Where an authorized institution uses the IMM(CCR) approach to calculate the default risk exposure of a netting set that contains SFTs-

(a) subject to paragraph (b), the institution must take into account the effect of any recognized netting in the manner set out in Part 6A instead of in the manner set out in section 96 or 97;

(b) paragraph (a) does not apply in the case of transactions for which the institution is permitted, under section 10B(5) or (6), not to use the IMM(CCR) approach.”.

(67)

36. Section 95 amended (netting of OTC derivative transactions and netting of credit derivative contracts booked in trading book)

(2) Section 95(6), definition of derivative transaction, paragraph (b)- Repeal

“booked in the trading book”.