Annex IIIa and IIIb-B: Examples of Calculation of Risk-Weighted Amount of CIS Exposure with Deductible Holding

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Annex IIIa and IIIb-B
Examples of calculation of risk-weighted amount of CIS exposure with portion constituting deductible holding The following examples deliberately incorporate certain assumptions for the sake of simplicity and ease of illustration. When determining the amount of capital deduction and the amount subject to risk-weighting for capital instruments or non-capital LAC liabilities in an actual case, AIs should always refer to and follow the relevant provisions set out in Division 4 of Part 3 (including the relevant schedules) of the BCR. The reporting arrangements are intended to illustrate what principal amounts should be reported when the collective investment scheme concerned has a leverage level of more than 1. Although risk-weights under the STC approach are used in the examples for illustration, the calculation steps illustrated also apply to the BSC approach. Example 1: Capital instruments held by a Level 1 CIS Consider a Level 1 CIS that has the following balance sheet:
Asset
Cash $20
CET1 capital instruments (AA- to AAA) issued by:
— financial sector entity A $100
— financial sector entity B $100
Debt securities (A rated) issued by sovereigns $280 Listed equities issued by — Commercial entity A $100 — Other commercial entities $400 Liabilities Note payable $50 Equity Shares $950 Moreover, assume the following:
 an AI using the STC approach owns 20% of the shares of the Level 1 CIS and the principal amount of the AI’s equity investment in the Level 1 CIS (PCIS exposure) is $190;

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 financial sector entities A and B and commercial entity A have the following relationship with the AI:
— the AI owns less than 10% of the issued ordinary share capital of financial sector entity A and owns more than 10% of the issued ordinary share capital of financial sector entity B. Both financial sector entities are not subject to a section 3C requirement and they are not affiliates of the AI; and — commercial entity A is an affiliate of the AI; and  none of the listed equities held by the Level 1 CIS are required to be deducted from the AI’s CET1 capital under §43 of the BCR. Moreover, the other commercial entities are not affiliates of the AI and the AI does not have any shareholdings in them. Portion of the AI’s CIS exposure that constitutes deductible holding (§70AC) Given— (a) total amount of regulatory deductible items held by the Level 1 CIS (PRDI) = $100 + $100 = $200; (b) total assets of the Level 1 CIS (TA) = $1000; and (c) equity of the Level 1 CIS (TE) = $950, amount of the AI’s CIS exposure to the Level 1 CIS that constitutes deductible holding (PDH) is calculated as follows:
𝑃𝐷𝐻 =
(𝑃𝑅𝐷𝐼)
(𝑇𝐴)
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒
=
(200)
(1000)
∙ (190) = 38
However, since the Level 1 CIS uses leverage, the AI’s actual exposure to the regulatory deductible items = leverage of Level 1 CIS × PDH = (1000) (950) ∙ (38) = 40 Alternatively, the AI may calculate the amount of its indirect holding of the regulatory deductible items by multiplying PRDI by 20% = 200 × 20% = 40

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Amount of the AI’s deductible holding subject to capital deduction After applying all the relevant provisions in Division 4 of Part 3 (including relevant schedules) of the BCR, the AI determines that the total amount of the deductible holding that must be deducted from its CET1 capital is $34. RWA of the AI’s deductible holding not subject to capital deduction RWA = (4×100%) + (2×250%) = $9 Principal amount Risk￾weight RWA Capital deduction CET1 capital instruments issued by:
— financial sector entity A
(BCR §43(1)(o), §70AC(3)(a) and Schedule 4F)
 share of the AI that is subject to risk-weighting $4 100% $4 -  share of the AI that is subject to capital deduction $16 - - $16 — financial sector entity B (BCR §43(1)(p), §70AC(3)(b) and Schedule 4G)  share of the AI that is subject to risk-weighting $2 250% $5 -  share of the AI that is subject to capital deduction $18 - - $18 Portion of the AI’s CIS exposure that does not constitute deductible holding (Part 6B and §226ZT) Under the LTA, the risk-weighted amount (RWA) of the underlying exposures of the Level 1 CIS are calculated as follows:
Principal amount
Risk￾weight
RWA
Cash (BCR §63) $20 0% $0
Debt securities (A rated) issued by sovereigns (BCR §55) $280 20% $56 Listed equities

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— Commercial entity A (BCR §226ZO(3)(a) and §66) $100 100% $100 — Other commercial entities (BCR §66) $400 100% $400 Given— (a) underlying exposures of the Level 1 CIS that are not regulatory deductible items (Pnon-RDI) = 1000 – 200 = 800; and (b) RWAnon-RDI is the RWA of Pnon-RDI calculated by using the LTA, amount of the AI’s CIS exposure to the Level 1 CIS that does not constitute deductible holding (Pnon-DH) is calculated as follows:
𝑃𝑛𝑜𝑛−𝐷𝐻 =
(𝑃𝑛𝑜𝑛−𝑅𝐷𝐼)
(𝑇𝐴)
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒
=
(800)
(1000)
∙ (190) = 152
RWAnon-DH is then calculated as follows:
𝑅𝑊𝐴𝑛𝑜𝑛−𝐷𝐻 = (
𝑅𝑊𝐴𝑛𝑜𝑛−𝑅𝐷𝐼
𝑇𝐴 − 𝑃𝑅𝐷𝐼
) ∙
𝑇𝐴
𝑇𝐸 ∙ 𝑃𝑛𝑜𝑛−𝐷𝐻
= (
20∙0%+280∙20%+100∙100%+400∙100%
1000−200 ) ∙
1000
950
∙152
= (
56 + 100 + 400
800 ) ∙ 160
= 111.2

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Reporting arrangements for Part IIIb of MA(BS)3 Reporting of the portion that does not constitute deductible holding Reporting of the portion that constitutes deductible holding and is subject to risk-weighting

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Example 2: Capital instruments held by a Level 2 CIS Consider a Level 1 CIS that has the following balance sheet:
Asset
Cash $20
CIS exposure to a Level 2 CIS $40
Debt securities (A rated) issued by sovereigns $580 Listed equities $360 Liabilities Note payable $50 Equity Shares $950 Moreover, assume the following:
 an AI using the STC approach owns 20% of the shares of the Level 1 CIS and the principal amount of the AI’s equity investment in the Level 1 CIS (PCIS exposure) is $190; and  the AI is able to use the LTA to calculate the RWAs of the underlying exposures of the Level 1 CIS and the Level 2 CIS. The following is the balance sheet of the Level 2 CIS:
Asset
Cash $10
CET1 capital instruments (AA- to AAA) issued by financial sector entity A $200 Debt securities (A rated) issued by sovereigns $190 Listed equities $400 Liabilities Note payable $0 Equity Shares $800  The AI owns less than 10% of the issued ordinary share capital of financial sector entity A which is neither an entity subject to a section 3C requirement nor an affiliate of the AI.

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 None of the listed equities held by the Level 1 CIS and the Level 2 CIS are required to be deducted from the AI’s CET1 capital under §43 of the BCR. Moreover, none of these equities are issued by commercial entities that are affiliates of the AI. The AI also does not have any shareholdings in the commercial entities. Step 1: Level 1 CIS’s CIS exposure to Level 2 CIS Under the LTA, the RWA of the Level 1 CIS’s CIS exposure to the Level 2 CIS (RWA CIS expo 2) is calculated as follows:
𝑅𝑊𝐴𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2 =
𝑃𝑅𝐷𝐼∙𝑅𝑊𝑅𝐷𝐼+𝑅𝑊𝐴𝑛𝑜𝑛−𝑅𝐷𝐼
𝑇𝐴2
∙
𝑇𝐴2
𝑇𝐸2
∙ (𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2) … (1) where—
(a) PRDI is the amount of regulatory deductible items held by the Level 2 CIS; (b) RWRDI is the risk-weight1 applicable to the regulatory deductible items; (c) RWAnon-RDI is the RWA of the underlying exposures of the Level 2 CIS that are not regulatory deductible items; (d) TA2 is the total assets of the Level 2 CIS; (e) TE2 is the equity of the Level 2 CIS; and (f) PCIS expo 2 is the CIS exposure of the Level 1 CIS to the Level 2 CIS. By rearranging equation (1) above, the CIS exposure to the Level 2 CIS and its RWA can be divided into two portions— 𝑅𝑊𝐴𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2 = 𝑃𝑅𝐷𝐼 ∙ 𝑅𝑊𝑅𝐷𝐼 𝑃𝑅𝐷𝐼 ∙ 𝑇𝐴2 𝑇𝐸2 ∙ ( 𝑃𝑅𝐷𝐼 𝑇𝐴2 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2) + 𝑅𝑊𝐴𝑛𝑜𝑛−𝑅𝐷𝐼 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 ∙ 𝑇𝐴2 𝑇𝐸2 ∙ ( 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 𝑇𝐴2 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2) = 𝑃𝑅𝐷𝐼 ∙ 𝑅𝑊𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆 + 𝑅𝑊𝐴𝑛𝑜𝑛−𝑅𝐷𝐼 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 ∙ 𝑇𝐴2 𝑇𝐸2 ∙ ( 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 𝑇𝐴2 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2)… (2) where— (a) %L1 CIS is the share of the Level 1 CIS in the equity of the Level 2 CIS; and (b) Pnon-RDI is the amount of underlying exposures (other than regulatory deductible items) held by the Level 2 CIS.

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In order to illustrate how to identify the portion of a CIS exposure that contributes to the deductible holding of the AI, capital deduction is represented by the application of a risk-weight (i.e. 1250%) in the equations in this example.

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For the portion of the CIS exposure in relation to underlying exposures other than regulatory deductible items (i.e. the portion that is subject to Part 6B of the BCR, where the regulatory deductible items are excluded in accordance with §226ZX(2)), the RWA of that portion is calculated as follows:
Principal amount
Risk￾weight
RWA
Cash (BCR §63) $10 0% $0
Debt securities (A rated) issued by sovereigns (BCR §55) $190 20% $38 Listed equities (BCR §66) $400 100% $400 𝑅𝑊𝐴 = 𝑅𝑊𝐴𝑛𝑜𝑛−𝑅𝐷𝐼 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 ∙ 𝑇𝐴2 𝑇𝐸2 ∙ ( 𝑃𝑛𝑜𝑛−𝑅𝐷𝐼 𝑇𝐴2 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2) = ( 10 ∙ 0% + 190 ∙ 20% + 400 ∙ 100% 800 − 200 ) ∙ 800 800 ∙ 600 800 ∙ 40 = 21.9 Step 2: AI’s CIS exposure to Level 1 CIS 𝑅𝑊𝐴𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 = 𝑅𝑊𝐴𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 2+𝑅𝑊𝐴𝑛𝑜𝑛−𝐶𝐼𝑆 𝑇𝐴1 ∙ 𝑇𝐴1 𝑇𝐸1 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 … (3) where— (a) RWACIS expo is the RWA of the AI’s CIS exposure to the Level 1 CIS; (b) RWAnon-CIS is the RWA of the underlying exposures of the Level 1 CIS that are not CIS exposures; (c) PCIS expo is the amount of the AI’s CIS exposure to the Level 1 CIS; (d) TA1 is the total assets of the Level 1 CIS; and (e) TE1 is the equity of the Level 1 CIS. By substituting equation (2) into equation (3), the CIS exposure to the Level 1 CIS and its RWA can be divided into two portions— 𝑅𝑊𝐴𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 = 𝑃𝑅𝐷𝐼 ∙ 𝑅𝑊𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆 + 21.9 + 𝑅𝑊𝐴𝑛𝑜𝑛−𝐶𝐼𝑆 𝑇𝐴1 ∙ 𝑇𝐴1 𝑇𝐸1 ∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜

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=
𝑃𝑅𝐷𝐼 ∙ 𝑅𝑊𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
𝑇𝐴1
∙
𝑇𝐴1
𝑇𝐸1
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜 +
21.9 + 𝑅𝑊𝐴𝑛𝑜𝑛−𝐶𝐼𝑆
𝑇𝐴1
∙
𝑇𝐴1
𝑇𝐸1
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜
=
𝑃𝑅𝐷𝐼 ∙ 𝑅𝑊𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
∙
𝑇𝐴1
𝑇𝐸1
∙ (
𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
𝑇𝐴1
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜) +
21.9 + 𝑅𝑊𝐴𝑛𝑜𝑛−𝐶𝐼𝑆
𝑇𝐴1 − 𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
∙
𝑇𝐴1
𝑇𝐸1
∙ (
𝑇𝐴1 − 𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
𝑇𝐴1
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜)
Portion of the AI’s CIS exposure that does not constitute deductible holding (Part 6B) For the portion of the AI’s CIS exposure that does not constitute deductible holding (i.e. the portion that is subject to Part 6B of the BCR), the amount of that portion is calculated as follows:
=
𝑇𝐴1 − 𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
𝑇𝐴1
∙ 𝑃𝐶𝐼𝑆 𝑒𝑥𝑝𝑜
=
1000 − 200 ∙ 5%
1000 ∙ 190
= 188.1
The RWA of that portion (RWAnon-DH) is calculated as follows:
Principal amount
Risk￾weight
RWA
Cash (BCR §63) $20 0% $0
CIS exposure to a Level 2 CIS - - $21.92
Debt securities (A rated) issued by sovereigns (BCR §55) $580 20% $116 Listed equities (BCR §66) $360 100% $360 𝑅𝑊𝐴𝑛𝑜𝑛−𝐷𝐻 =
21.9 + 𝑅𝑊𝐴𝑛𝑜𝑛−𝐶𝐼𝑆
𝑇𝐴1 − 𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆
∙
𝑇𝐴1
𝑇𝐸1
∙ 188.1
= (
0 + 21.9 + 116 + 360
1000 − 10 ) ∙
1000
950 ∙ 188.1
= 99.58

2 This is the RWA calculated under Step 1.

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Step 3: Portion of the AI’s CIS exposure to Level 1 CIS that constitutes deductible holding (§70AC) Amount of the AI’s CIS exposure to the Level 1 CIS that constitutes deductible holding (PDH) is calculated as follows:
𝑃𝐷𝐻 = 𝑃𝑅𝐷𝐼 ∙ %𝐿1 𝐶𝐼𝑆 ∙ %𝐴𝐼
= 200 ∙
40
800
∙
190
950
= 2 where %AI is the share of the AI in the equity of the Level 1 CIS. Amount of the AI’s deductible holding subject to capital deduction (§43(1)(o), §70AC(2)(a) and (c), and Schedule 4F) After applying all the relevant provisions in Division 4 of Part 3 (including relevant schedules) of the BCR, the AI determines that the total amount of the deductible holding that must be deducted from its CET1 capital is $1. RWA of the AI’s deductible holding not subject to capital deduction (§70AC(2)(b) and (d) and (3)(a)) RWA = ($1×100%) = $1 Reporting arrangements for Part IIIb of MA(BS)3 Reporting of the portion that does not constitute deductible holding

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Reporting of the portion that constitutes deductible holding and is subject to risk-weighting