Annex IIIb-A: Illustrations on Reporting of Recognized Credit Risk Mitigation

Annex IIIb-A
Illustrations on Reporting of Recognized Credit Risk Mitigation All monetary figures in HK$ million unless otherwise stated. Case 1: On-balance sheet exposure – collateralized loan  Exposure: A 5-year term loan of $1,000 to an unrated corporate incorporated in Hong Kong.  Collateral: Debt securities that are− — issued by a bank; — denominated in Euro; — rated AA by the Standard & Poor’s; and — maturing in 7 years.  The collateral is subject to daily revaluation and presently has a market value of $1,050. Simple Approach

1. Calculation of Risk-weighted Amount
    Exposure: Applicable risk-weight (RW) is 100% (see §61(4) of the BCR).  Collateral: An AA-rating is mapped to a RW of 20% (see §59 (Table 3) of, and Table B in Schedule 6 to, the BCR).  Credit protection covered portion: $1,000  Credit protection uncovered portion: $0  RWA of the loan calculated by substituting the RW of the corporate with the RW of the collateral: $1,000 × 20% = $200

2. Reporting Arrangement
   Division A
   Comprehensive Approach

3. Calculation of Risk-weighted Amount
    Standard supervisory haircut applicable to the collateral: 8% (see item 2 in
   Part 1 of the Table in Schedule 7 to the BCR).
    Standard supervisory haircut for currency mismatch: 8% (see item 2 in Part 3 of the Table in Schedule 7).  As the above standard supervisory haircuts only assume a 10-day holding period, they have to be scaled up to haircuts for 20-day holding period (which is the minimum holding period assumed for secured lending transactions) using Formula 5A in §91(3) of the BCR and Formula 33 in §3 of Schedule 7:
   H = H10 x
   NR  (TM 1)
   = 8% x
   1 (20 1)
   = 11%
    The exposure after CRM (E*) is calculated by using Formula 2 in §87 of the BCR:
   E* = max {0, [E × (1 + He) - C × (1 - Hc - Hfx)]} = max {0, [1,000 × (1 + 0%1 ) - 1,050 × (1 - 11% - 11%)]}

1 As the lending involves only cash, no haircut is required for the loan exposure (i.e. He = 0).

= max (0, 181)
= 181
 RWA of the loan = E* × risk-weight of the unrated corporate = 181 × 100% = 181
2. Reporting Arrangement
Division A

Case 2: Off-balance sheet exposure - collateralized loan commitment Now assuming that the corporate borrower in Case 1 has not yet drawn down the loan facility and the facility has an original maturity of 2 years (i.e. the borrower has to draw down the loan within 2 years). It is also assumed that the loan facility cannot be cancelled by the AI unconditionally. Simple approach

1. Calculation of Risk-weighted Amount
    CCF applicable to a commitment with an original maturity over 1 year: 50% (see item 9(b) of Table 10 in §71(1) of the BCR).  CEA of the commitment = $1,000 × 50% = $500  RWA of the commitment (with the RW of the corporate replaced by the RW of the collateral): $500 × 20% = $100
2. Reporting Arrangement
   Division A

Division B - I
Comprehensive Approach

1. Calculation of Risk-weighted Amount
    The standard supervisory haircuts for both the collateral and the currency mismatch are scaled up from 8% to 11% (as shown in Case 1 above).  The CEA after CRM (E*) is calculated by using Formula 3 in §88 of the BCR:
   E* = max {0, [E × (1 + He) - C × (1 - Hc - Hfx)]} × CCF = max {0, [1,000 × (1 + 0%) - 1,050 × (1 - 11% - 11%)]} × 50% = 90.5  RWA of the loan commitment = E* × risk-weight of the unrated corporate = 90.5 × 100% = 90.5

2. Reporting Arrangement
   Division A
   Division B – I

Case 3: Collateralized derivative contract covered by recognized guarantee  Interest rate contract with a notional of $1,000 with a four-year residual maturity.  Not subject to margin agreement and netting agreement.  The counterparty is an unrated corporate.  The contract is covered by a guarantee of $8 provided by a bank with an “A1” Moody’s rating.  It is assumed that the replacement cost and potential future exposure of the contract calculated under the SA-CCR approach are $1 and $18 respectively.

1. Calculation of Risk-weighted Amount
   Default risk exposure in respect of the interest rate contract is calculated as follows:
   𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑖𝑠𝑘 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 = 𝑎𝑙𝑝ℎ𝑎 ∗ (𝑅𝐶 + 𝑃𝐹𝐸) = 1.4 ∗ (1 + 18) = 26.6  RW applicable to the bank guarantee: 50%.  RWA of credit protection covered portion = $8 × 50% = $4  RWA of credit protection uncovered portion = ($26.6 - $8) × 100% = $18.6  Total RWA = $4 + $18.6 = $ 22.6

2. Reporting Arrangement
   Division A
   Division B - II