Completion Instructions for Form MA(BS)3(IIIf): Risk-weighted Amount for CVA

MA(BS)3(IIIf)/P.1 (06/2021) Completion Instructions Return of Capital Adequacy Ratio Part IIIf – Risk-weighted Amount for CVA Form MA(BS)3(IIIf) Introduction

1. Form MA(BS)3(IIIf) of Part III should be completed by each authorized institution (AI) incorporated in Hong Kong using the advanced CVA method or the standardized CVA method to calculate CVA capital charge under Division 3 of Part 6A of the Banking (Capital) Rules (BCR).
2. Reporting institutions (reporting AIs)should report in this Form the CVA capital charge calculated for all their counterparties (including clearing members or clearing clients in respect of transactions or contracts cleared by central counterparties, where applicable) in respect of the following contracts and transactions booked in the AIs’ banking book and trading book: (a) derivative contracts (including long settlement transactions); and (b) securities financing transactions (including long settlement transactions) if required by the Monetary Authority (MA) under section 10A(6) of the BCR.
3. Reporting AIs are not required to calculate CVA capital charge for items specified in Schedule 1A to the BCR.
4. This Form is divided into two divisions: (a) Reporting AIsthat are eligible to use the advanced CVA method (see section 10A(3) and (4) of the BCR) should complete Division A in respect of contracts and transactions for which the CVA capital charge is calculated under the advanced CVA method. (b) Where a reporting AI that is eligible to use the advanced CVA method is required to use the standardized CVA method to calculate the CVA capital charge for certain transactions or counterparties (see section 10C of the BCR), the AI should report the transactions or counterparties concerned in Division B. (c) All other reporting AIs (i.e. those that are required to use the standardized CVA method) should complete Division B, including reporting AIs that are no longer eligible to use the advanced CVA method (see section 10D of the BCR).
5. This Form and its completion instructions should be read in conjunction with the BCR and the relevant supervisory policy/guidance related to the capital adequacy framework.

MA(BS)3(IIIf)/P.2 (06/2021) Section A: General Instructions 6. A reporting AI should not include a CVA hedge in its CVA capital charge calculation unless the hedge is an eligible CVA hedge (see section 226T of the BCR). 7. For the calculation of total EADi under Formula 23J in section 226S(1) of the BCR, a reporting AI that concurrently uses – (a) the IRB approach to calculate its credit risk for non-securitization exposures to the counterparty, and (b) the method set out in section 226MJ of the BCR to calculate its default risk exposures in respect of securities financing transactions, may recognize the credit risk mitigating effect of recognized collateral1 by applying Formula 19 and in accordance with section 160(3) of the BCR, and take the resulting net credit exposure (E*) as the basis for determining the total EADi of a netting set in accordance with other applicable provisions of section 226S of the BCR. 8. To avoid double-counting, the AI should ensure that the expected exposures (EEs) (in the case of advanced CVA method) or total EADi (in the case of standardized CVA method) used in the CVA capital charge calculations have not been adjusted for the credit risk or CVA risk mitigation effect of any eligible CVA hedges that the AI intends to use to reduce its CVA capital charge. 9. Recognized credit derivative contracts purchased for hedging default risk exposures to counterparties should be included in the CVA capital charge calculation in the manner mentioned in section 226P(5) or 226S(7) of the BCR, as the case requires. Section B: Reporting arrangements for Division A of Part IIIf Advanced CVA Method 10. The reporting AI should generate the VaR and stressed VaR by using the VaR model approved by the MA for calculating the specific risk for interest rate exposures under the IMM approach and in accordance with sections 226P, 226Q and 226T of the BCR. Item 1 – VaR 11. Item 1 refers to the VaR calculated based on EEs that are estimated using parameters calibrated to current market data. 12. Report in the column “End of quarter” the VaR as at the last trading day of the reporting quarter.

1 See definition of “recognized collateral” in section 139(1) of the BCR.

MA(BS)3(IIIf)/P.3 (06/2021) 13. Report in the column “Average VaR” the average VaR for the last 60 trading days. The VaR of each trading day should be generated as mentioned in paragraph 10 above. 14. Report in the column “Multiplication factor for VaR” the multiplication factor (mc) determined in the same manner as in section 319(1) of the BCR. The minimum value of the multiplication factor is 3. 15. Report in the column “Risk-weighted Amount” the CVA risk-weighted amount calculated based on the following formula: 𝑅𝑊𝐴𝐶𝑉𝐴 = 𝑀𝑎𝑥[𝑉𝑎𝑅𝑇; 𝑉𝑎𝑅𝑎𝑣𝑔 ∙ 𝑚𝑐 ] ∙ 12.5 where—  𝑅𝑊𝐴𝐶𝑉𝐴 is the CVA risk-weighted amount;  𝑉𝑎𝑅𝑇 is the VaR as at the last trading day of the reporting quarter; and  𝑉𝑎𝑅𝑎𝑣𝑔 is the average VaR for the last 60 trading days. Item 2 – Stressed VaR 16. Item 2 refers to the stressed VaR calculated based on EEs that are estimated using a stress calibration as set out in section 3(f)(i) of Schedule 2A of the BCR. The period of stress should be the most severe 1-year stress period within the 3-year period used for the stress calibration. 17. Report in the column “Latest available” the reporting AI’s latest available stressed VaR. 18. Report in the column “Average Stressed VaR” the average stressed VaR for the last 60 trading days. The stressed VaR of each trading day should be generated as mentioned in paragraph 10 above. 19. Report in the column “Multiplication factor for Stressed VaR” the multiplication factor (ms) determined in the same manner as in section 319(4) of the BCR. The minimum value of the multiplication factor is 3. 20. Report in the column “Risk-weighted Amount” the CVA risk-weighted amount calculated based on the following formula: 𝑅𝑊𝐴𝐶𝑉𝐴 = 𝑀𝑎𝑥[𝑆𝑉𝑎𝑅; 𝑆𝑉𝑎𝑅𝑎𝑣𝑔 ∙ 𝑚𝑠 ] ∙ 12.5 where—  𝑅𝑊𝐴𝐶𝑉𝐴 is the CVA risk-weighted amount;  𝑆𝑉𝑎𝑅 is the latest available stressed VaR; and

MA(BS)3(IIIf)/P.4 (06/2021)  𝑆𝑉𝑎𝑅𝑎𝑣𝑔 is the average stressed VaR for the last 60 trading days. Section C: Reporting arrangements for Division B of Part IIIf Standardized CVA Method Item 3 21. The column “Default Risk Exposures” refers to the sum of the default risk exposures of all the reporting AI’s netting sets (i.e. total EADi in Formula 23J in section 226S of the BCR) that are subject to the CVA capital charge requirement. The amount reported in the column should be the amount before applying the discount factor as required by section 226S(1)(c) of the BCR. 22. The column “Capital Charge” refers to the CVA capital charge for a portfolio of counterparties calculated in accordance with sections 226S and 226T of the BCR. 23. When using Formula 23J— (a) if the reporting AI has more than one netting set with counterparty “i”, the AI should multiply the default risk exposure (EADi) (after applying the discount factor mentioned in section 226S(1)(c)(i) of the BCR, if applicable) of each of the netting sets by the netting set’s effective maturity (Mi) and then aggregate the product obtained (i.e. Mi·EADi ) for each netting set, and use the aggregate as the input for total Mi EADi  in Formula 23J; (b) if there is more than one single-name eligible CVA hedge for hedging the CVA risk in respect of counterparty “i”, the AI should multiply the notional amount (Bi) (after applying the discount factor mentioned in section 226S(1)(d) of the BCR) of each eligible CVA hedge by its maturity ( hedge Mi ) and then aggregate the product obtained (i.e. hedge Mi Bi ) for each eligible CVA hedge, and use the aggregate as the input for hedge Mi Bi in Formula 23J; (c) if there is more than one index eligible CVA hedge for hedging CVA risk, the AI should multiply the notional amount (Bind) (after applying the discount factor mentioned in section 226S(1)(e)(i) of the BCR) of each index eligible CVA hedge by its maturity (Mind) and then aggregate the product obtained (i.e. Mind Bind  ) for each eligible CVA hedge, and use the aggregate as the input for Mind Bind  in Formula 23J; and (d) if the reporting AI falls within the description of paragraph 7(a) and (b), it may take into account the credit risk mitigating effect of collateral in the calculation of total EADi in accordance with that paragraph.

MA(BS)3(IIIf)/P.5 (06/2021) 24. Report in the column “Risk-weighted Amount” the CVA risk-weighted amount calculated based on the following formula: CVA risk-weighted amount = CVA capital charge × 12.5 Hong Kong Monetary Authority June 2021