Annex IIIe-B Example of calculation of risk-weighted amount of default risk exposure to central counterparty

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Annex IIIe-B
Example of calculation of risk-weighted amount of default risk exposure to central counterparty An AI, which is a clearing member of a qualifying central counterparty (QCCP), enters into a margin agreement with the QCCP under which only the AI is required to post variation margin (VM) (i.e. the agreement is a one-way margin agreement). The AI uses the SA-CCR approach to calculate default risk exposures of derivative contracts. As of 30 June—  the principal amount of the derivative contracts in the netting set with the QCCP is HK$300 million;  the AI has posted initial margin (IM) of HK$2 million and VM of HK$0.5 million to the QCCP; and  the haircut applicable to the IM is 5% while the haircut applicable to the VM is 0%.
I. Calculation of risk-weighted amount of default risk exposures (all monetary
figures are expressed in HK$’000 unless otherwise specified) Since a one-way margin agreement is not a variation margin agreement as defined in
section 226BA of the BCR, derivative contracts covered by a one-way margin
agreement is treated as unmargined contracts (see paragraph (a) of the definition of “unmargined contracts” in section 226BA). Hence, the default risk exposure of the netting set with the QCCP must be calculated in accordance with section 226BC of the BCR.

1. Calculation of RC
   Under section 226BC, RC is calculated by using Formula 23AB as follows:
   RC = max(V − C; 0)
   (a) The AI determines that the current mark-to-market value (V) of the netting set is +3000; and

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(b) C (i.e. the haircut value of net collateral held for the netting set by the AI) is calculated in accordance with section 226BC(4) of the BCR as follows:
(i) haircut value of VM posted (calculated under section 226BJ(4)) = 500 × (1 + 0%) = 500 (ii) NICA (calculated under section 226BJ(3)) = 0 – 2000 × (1 + 5%) = −2100 (iii) C = −2100 – (500) = −2600 (c) therefore, RC = 3000 – (–2600) = 5600
2. Calculation of potential future exposure (PFE)
The AI determines that the PFE of the netting set, as calculated in accordance with section 226BR(1) of the BCR, is HK$10 million.
3. Calculation of default risk exposure
The default risk exposure to the QCCP = 1.4 × (RC + PFE) = 1.4 × (5600 + 10000) = 21840
II. Reporting Arrangement
Part IIIe
(in HK$'000)
Division B: Default Risk Exposures
Clearing member's exposures
Collateral posted
Non-IMM(CCR) IMM(CCR)
Total Risk- Risk￾Principal Default Risk Default Risk Principal Exposure weight weighted Amount Exposure Exposure Amount After CRM % Amount (B1) (B2) (B3) (B4) (B5) (B6) (B7)

1. Qualifying CCPs
   1a. Risk-weight 0%
   1b. Risk-weight 2% 300,000 21,840 21,840 2 437 1c. Other risk-weights not specified above
2. Non-qualifying CCPs
   2a. Risk-weight 0%
   SUBTOTAL 300,000 21,840 21,840 437
   Derivative Contracts and SFTs