Consultation on Implementation of Interest Rate Risk in the Banking Book (IRRBB) Standards

Interest Rate Risk in the Banking Book
Consultation paper | CP 17.04
June 2017

Contents
I INTRODUCTION ........................................................................................................3
1 Purpose....................................................................................................................3
2 Background ..............................................................................................................3
II APPLICATION............................................................................................................4
3 Scope .......................................................................................................................4
4 Measurement of IRRBB.............................................................................................5
5 Outlier test...............................................................................................................5
III THE STANDARDISED FRAMEWORK............................................................................6
6 Basic calculation methodology..................................................................................6
7 Slotting cash flows with optionality ..........................................................................8
7.1 Fixed rate loans subject to prepayment risk .......................................................................8
7.2 Term deposits subject to early redemption risk .................................................................9
7.3 Non-maturity deposits ........................................................................................................11
7.4 Automatic interest rate options.........................................................................................12
7.5 Off-balance sheet commitments........................................................................................12
8 Interest rate shock scenarios...................................................................................13
9 Other......................................................................................................................14
9.1 Time bands and midpoints..................................................................................................14
9.2 Coupon cash flows...............................................................................................................15
9.3 Impact on earnings..............................................................................................................17
IV OTHER AMENDMENTS ............................................................................................17
10 IRR return amendments..........................................................................................17
10.1 Reporting scope and frequency..........................................................................................17
10.2 Amendments to the IRR return template..........................................................................18
10.3 Other.....................................................................................................................................18
11 SPM amendments ..................................................................................................18
12 Public disclosure .....................................................................................................19
13 Supplementary IRR return ......................................................................................19

I INTRODUCTION
1 Purpose
1 This consultation paper sets out the Hong Kong Monetary Authority’s (HKMA) proposals for updating the current Supervisory Policy Manual (SPM) module IR-1 "Interest Rate Risk Management"1 and the return of “MA(BS)12–Interest Rate Risk Exposures"2 (IRR return). 2 The HKMA invites comments on the proposals in this paper, as well as the draft SPM and IRR return, by 11 August 2017. 3 Following the close of this consultation, the HKMA will further refine its proposals taking into account the feedback received. We intend to publish the final SPM in Q3 2017, with the expectation that AIs should be ready to measure and report interest rate exposure measures based on the new standardised framework by 1 January 2018. 2 Background 4 In April 2016 the Basel Committee on Banking Supervision (BCBS) issued new standards on “Interest rate risk in the banking book”3 (IRRBB). These standards are intended to replace an earlier guidance set out in the 2004 “Principles for the management and supervision of interest rate risk”4 , which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and controlling interest rate risk. 5 Under the new BCBS standards, banks are required to calculate their IRRBB exposures based on the impact on economic value of equity (EVE) under a set of prescribed interest rate shock scenarios, either using the standardised framework or internal models. Banks that have IRRBB exposures exceeding 15% of their Tier 1 capital are identified as “outliers” and considered as potentially having undue IRRBB and subject to review. In addition, banks are required to disclose their IRRBB exposures to the public on a regular basis. 1 www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/IR-1.pdf 2 www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/IR-1-return.pdf 3 www.bis.org/bcbs/publ/d368.htm 4 www.bis.org/publ/bcbs108.htm

6 The HKMA proposes to implement the new BCBS framework locally, building on the proposals set out in this paper, from 1 January 2018. The updated SPM will set out the key elements of the standardised framework, as well as the HKMA’s approach to the supervision of AI’s IRRBB management and monitoring of AI’s IRRBB exposures. AIs will be required to calculate and report their IRRBB exposures based on the standardised framework under the updated IRR return. The detailed proposals are set out in sections II, III and IV. The revised SPM and IRR return can be found at www.hkma.gov.hk/eng/key-functions/banking-stability/basel-3/consultation_on_impl ementation_of_irrbb.shtml. II APPLICATION 3 Scope 7 The new BCBS framework is applicable to all internationally active banks. National supervisors may however extend the framework to a wider range of banks. Consistent with the current SPM and IRR return, and in line with our policy on the local implementation of BCBS standards, we propose that the new framework should be applicable to all authorized institutions (AIs). Nonetheless, the HKMA adopts a risk-based supervisory approach and will monitor and supervise AIs’ management of IRRBB having regard to the nature and complexity of their activities. 8 While overseas incorporated AIs are not subject to the capital adequacy regime in Hong Kong, they should be able to measure and report their IRRBB exposures according to the new framework. Nevertheless, overseas incorporated AIs will not be subject to the outlier test (see Subsection 5 below). In addition, some of the IRRBB management guidelines, e.g. the guideline on capital adequacy assessment process (CAAP), only apply to locally incorporated AIs. 9 Currently, the IRR return is completed by locally incorporated AIs on a solo basis. However, to be consistent with the BCBS standards, we propose that the new framework should be applied to locally incorporated AIs on a consolidated basis. The scope of consolidation should follow that used for the purpose of Capital Adequacy Ratio (CAR) requirements as defined in the Banking (Capital) Rules. For overseas incorporated AIs, the reporting scope will stay the same, i.e. covering the positions of their Hong Kong operations only. 10 The current IRR return excludes all internal deals (except in the case where an overseas incorporated AI executes a deal with entities outside its reporting scope). Under the new framework, we propose to define internal deals as transactions

between units within the relevant reporting scope of the institution. Internal deals within the banking book should not be reported under the IRR return. For internal deals between the banking book and the trading book, the banking book leg of the internal deal should be reported if and only if the trading book leg of the deal is recognised under the market risk capital framework in the Banking (Capital) Rules. 4 Measurement of IRRBB 11 The new BCBS framework allows banks to use either the standardised framework or internal models to calculate EVE-based measures of IRRBB. We consider the standardised framework, with its six prescribed shock scenarios, to be both relevant and appropriate for the purposes of measuring the IRRBB exposures of all AIs. It is therefore our intention to require all AIs to be able to measure their IRRBB exposures based on the standardised EVE risk measure. The proposed changes to the SPM and the IRR return, following the standardised framework, are summarised in Sections III and IV. 12 To clarify, the use of the standardised framework is required for the purpose of regulatory reporting and identification of outliers only. AIs are still expected to use their internal methods for risk management purposes and CAAP. The HKMA may review the outputs of such internal methods, especially for (i) AIs that have been identified as outliers and (ii) outputs that differ substantially from those derived under the standardised framework. 13 Under the new BCBS framework, the measurement of IRRBB should be based on outcomes of EVE as well as earnings-based measures. While we will not provide a standardised methodology for calculating earnings-based measures of IRRBB, AIs are expected to use a methodology commensurate with their business activities and risk profile, in accordance with the IRRBB management principles in the updated SPM. In addition, AIs are required to publicly disclose their earnings-based IRRBB exposures on a regular basis (see Subsection 12). 5 Outlier test 14 The current SPM (para. 4.5.5) states that when reviewing the capital adequacy of locally incorporated AIs, the HKMA will be particularly attentive to “outlier AIs” – those with a decline in EVE of more than 20% of their capital base as a result of applying the standardised interest rate shock. Following the new BCBS framework, we propose to update the threshold to 15% of Tier 1 capital. In addition, an AI will be

identified as an outlier if its decline in EVE exceeds the threshold under any one of the six standardised interest rate shock scenarios. 15 Once identified as an outlier, the AI may be asked to strengthen its capital position or reduce its interest rate risk exposures, depending on the circumstances of each case. However, the outlier AI may not need to take any action if it can demonstrate that its outlier status results from the AI’s specific IRRBB profile that is not adequately captured by the standardised framework and that the AI’s firm-specific internal model would be able to better reflect its actual IRRBB exposure. III THE STANDARDISED FRAMEWORK 6 Basic calculation methodology 16 This section describes our proposed changes to the SPM and the IRR return for the purpose of measuring IRRBB exposures, largely based on the BCBS framework. The calculation of the standardised EVE risk measure involves the following key steps:

• For a given currency 𝑐 and time band 𝑘, calculate the net position 𝐶𝐶0,𝑐(𝑘)
  (and 𝐶𝐶𝑖,𝑐(𝑘) under interest rate shock scenario 𝑖) by slotting cash flows into time bands based on their earliest interest rate repricing dates, both under current conditions and under each of the six interest rate shock scenarios (see Subsection 8). Both notional principals and coupon cash flows should be slotted (see Subsection 9.2 below). Note that the net position under interest rate shock scenarios may vary depending on the way cash flows with optionality are slotted (see Subsection 7).
• For each scenario 𝑖, calculate the impact on EVE (∆𝐸𝑖,𝑐(𝑘)) for a given currency
  and time band as
  ∆𝐸𝑖,𝑐(𝑘) = 𝐶𝐶0,𝑐(𝑘) ∙ exp�−𝑟0,𝑐(𝑘) ∙ 𝑡𝑘� − 𝐶𝐶𝑖,𝑐(𝑘) ∙ exp�−𝑟𝑖,𝑐(𝑘) ∙ 𝑡𝑘� where 𝑟0,𝑐(𝑘) denotes the current risk-free rate (at the midpoint of the time band), 𝑟𝑖,𝑐(𝑘) denotes the risk-free rate under scenario 𝑖 (at the midpoint of the time band) and 𝑡𝑘 denotes the midpoint of each time band 𝑘 (measured in years – see Subsection 9.1).
• Calculate the interest rate option risk measure 𝐾𝐾𝐾𝑖,𝑐 under each scenario 𝑖 as
  the current net value of interest rate options (𝑉 0,𝑐) minus the net value of interest rate options under the interest rate shock scenario (𝑉 𝑖,𝑐 ), i.e. 𝐾𝐾𝐾𝑖,𝑐 = 𝑉 0,𝑐 − 𝑉 𝑖,𝑐. The net value of interest rate options under the interest rate shock scenario should be calculated using the new yield curve under

scenario 𝑖, and assuming a relative increase in the implicit volatility of 25%. See Subsection 7.4 for more details on interest rate options.

• Calculate the impact on EVE across all time bands for a given currency and
  scenario as
  ∆𝐸𝑖,𝑐 = max �0,�∆𝐸𝑖,𝑐(𝑘)
  𝑘

• 𝐾𝐾𝐾𝑖,𝑐�

• Repeat the above for all applicable currencies, including HKD and USD, as well as
  other currencies in which the AI has significant positions (see paragraph 17 below). In addition, AIs are required to treat onshore Renminbi (CNY) and offshore Renminbi (CNH) as separate currencies. AIs should treat their assets or liabilities as denominated in CNH if the associated interest rates are priced (either directly or indirectly) based on offshore reference rates (such as CNH HIBOR), and vice versa.
• The aggregate EVE risk measure (∆𝐸) across all applicable currencies is calculated
  as the maximum loss across the six interest rate shock scenarios:
  ∆𝐸 = max
  𝑖∈{1,2,…,6}
  ��∆𝐸𝑖,𝑐
  𝑐
  �
  17 The BCBS framework requires AIs to slot all future repricing cash flows (including coupon cash flows – see Subsection 9.2) from:
• interest rate-sensitive assets, which are not deducted from Common Equity Tier 1
  (CET1) capital and which exclude (i) fixed assets such as real estate or intangible assets and (ii) equity exposures in the banking book;
• interest rate-sensitive liabilities, (including all non-remunerated deposits), other
  than CET1 capital under the Basel III framework; and
• interest rate-sensitive off-balance sheet items.
  The Completion Instructions of the current IRR return will be amended to reflect the definition above. Most notably, non-remunerated deposits (e.g. deposits in current accounts) will need to be reported as non-maturity deposits under interest-bearing liabilities. 18 The methodology for slotting cash flows into time bands is similar to the one in the Completion Instructions of the current IRR return, i.e. according to the earliest interest repricing date. However, there is a separate methodology for slotting cash flows with optionality, including fixed rate loans subject to prepayment risk, term deposits subject to early redemption risk, non-maturity deposits and automatic interest rate options – see Subsection 7 for details.

19 As in the Completion Instructions of the IRR return, an AI would be regarded as having a significant position in a currency if the sum of its on-balance sheet assets or liabilities, whichever is the larger, in that currency and its off-balance sheet positions in the same currency is more than 5% of its total on-balance sheet assets in all currencies. Additionally, we propose to set a cap on total positions in non-reported currencies. That is, the total positions in non-reported currencies could not exceed 10% of an AI’s total on-balance assets in all currencies. If an AI’s total positions in non-reported currencies exceeded 10% of its total assets, the AI should report these positions, starting from the largest, until the remaining positions in non-reported currencies fall below 10% of its total assets. 20 AIs also need to identify the risk-free rate for the midpoint of each time band and for each currency at the reporting date (𝑟0,𝑐(𝑘)). This may be determined, for example, based on a secured interest rate swap curve. AIs may add commercial margins and other spread components to this rate only if they have been included in the cash flows (see Subsection 9.2 below). 7 Slotting cash flows with optionality
7.1 Fixed rate loans subject to prepayment risk
21 Fixed rate loans subject to prepayment risk are fixed rate loan products where the full economic cost of prepayments cannot be charged, or charged only for prepayments above a certain threshold, to the borrower. 22 Non-retail fixed rate loans subject to prepayment risk should be treated as an asset with embedded options and decomposed into a standard fixed rate loan and an automatic interest rate option. Retail loans are defined as loans satisfying the criteria in section 64(1)(a) and 64(1)(b) of the Banking (Capital) Rules. 23 For retail fixed rate loans subject to prepayment risk, AIs should determine, using own estimates, the baseline conditional prepayment rate 𝐶𝐶𝐶0,𝑐,𝑝 for a given portfolio 𝑝 of homogeneous loan products subject to prepayment risk denominated in a given currency 𝑐, under the prevailing term structure of interest rates.5 The conditional prepayment rate under interest rate shock scenario 𝑖 is then given by:
𝐶𝐶𝐶𝑖,𝑐,𝑝 = min�1, 𝛾𝑖 ∙ 𝐶𝐶𝐶0,𝑐,𝑝� 5 The base 𝐶𝐶𝐶 may vary over the life of the loan. In this case, it is denoted 𝐶𝐶𝐶0,𝑐,𝑝,𝑘.

where 𝐶𝐶𝐶0,𝑐,𝑝 is the (constant) baseline CPR and 𝛾𝑖 is a multiplier for scenario 𝑖 as given in Table 1. 24 The prepayments on the fixed rate loans can be broken down to scheduled payments adjusted for prepayment and uncompensated prepayments 6 . The cash flows to be slotted into time band 𝑘 are given by:
𝐶𝐶𝑖,𝑐,𝑝(𝑘) = 𝐶𝐶𝑆,𝑐,𝑝(𝑘) + 𝐶𝐶𝐶𝑖,𝑐,𝑝 ∙ 𝑁 𝑖,𝑐,𝑝(𝑘 − 1) where 𝐶𝐶𝑆,𝑐,𝑝(𝑘) refers to the scheduled interest payment 7 and principal repayment, and 𝑁 𝑖,𝑐,𝑝(𝑘 − 1) denotes the notional outstanding at the end of the previous period.8 AIs should repeat the above for each loan portfolio and currency to calculate the aggregate position in each time band. Scenario number (𝑖) Interest rate shock scenarios 𝛾𝑖 (scenario multiplier) 1 Parallel up 0.8 2 Parallel down 1.2 3 Steepener 0.8 4 Flattener 1.2 5 Short rate up 0.8 6 Short rate down 1.2
Table 1
7.2 Term deposits subject to early redemption risk
25 Term deposits subject to early redemption risk are term deposits that can be withdrawn early at the discretion of the customer. Term deposits may only be treated as a standard fixed rate deposit and be slotted into the time band according to their contractual maturity dates if:

• the depositor has no legal right to withdraw the deposit; or
  6 Uncompensated prepayments are prepayments where the full economic cost of prepayments cannot be charged, or charged only for prepayments above a certain threshold, to the borrower. 7 The scheduled interest payment should only be included when reporting net positions including coupon cash flows in the IRR return. 8 For simplicity, we have assumed there is no annual limit on prepayments. If an AI has an annual limit on uncompensated prepayments, this limit will apply.

• an early withdrawal results in a significant penalty that at least compensates for
  the loss of interest between the date of withdrawal and the contractual maturity date and the economic cost of breaking the contract.9 If neither of these conditions is met, the depositor holds an option to withdraw and the term deposits are deemed to be subject to early redemption risk. 26 Non-retail term deposits or bonds subject to early redemption risk should be treated as a liability with embedded options and decomposed into a standard term deposit and an automatic interest rate option. Retail deposits are defined as deposits placed with a bank by individual persons. Deposits made by small business customers, as defined in Rule 39 of Banking (Liquidity) Rules, can also be treated as retail deposits. Deposits from legal entities, sole proprietorships or partnerships should be categorised as non-retail deposits. 27 For retail term deposits, AIs should calculate the cash flows using the following methodology. For each homogeneous portfolio 𝑝 of term deposits in a given currency 𝑐, AIs must determine the baseline term deposit redemption ratio 𝑇𝑇 0,𝑐,𝑝 and use it to slot the notional repricing cash flows. Term deposits which are expected to be redeemed early should be slotted into the overnight time band (𝑘 = 1). 28 The term deposit redemption ratio for time band 𝑘 under scenario 𝑖 is obtained by multiplying 𝑇𝑇 0,𝑐,𝑝 by a scalar 𝑢𝑖 as follows:
  𝑇𝑇 𝑖,𝑐,𝑝 = min�1, 𝑢𝑖 ∙ 𝑇𝑇 0,𝑐,𝑝� where the values of the scalars 𝑢𝑖 are set out in Table 2. 29 The notional repricing cash flows which are expected to be withdrawn early under interest rate shock scenario 𝑖 are given by:
  𝐶𝐶𝑖,𝑐,𝑝(1) = 𝑇𝑇0,𝑐,𝑝 ∙ 𝑇𝑇 𝑖,𝑐,𝑝 where 𝑇𝑇0,𝑐,𝑝 is the outstanding amount of term deposits in portfolio 𝑝. AIs should repeat the above for each loan portfolio and currency to calculate the aggregate position in each time band. 9 The economic cost of breaking the contract is the additional funding cost the AI would incur due to the early redemption, assuming the AI obtained term funding at the current interest rate, or the interest rate under the relevant interest rate shock scenario, to cover the remaining life of the original term deposit.

Scenario number (𝑖) Interest rate shock scenarios u𝑖 (scenario multiplier) 1 Parallel up 1.2 2 Parallel down 0.8 3 Steepener 0.8 4 Flattener 1.2 5 Short rate up 1.2 6 Short rate down 0.8
Table 2
7.3 Non-maturity deposits
30 Non-maturity deposits (NMDs) are deposits without a set maturity date that can be withdrawn at any time without notice, but a portion of which tend to remain with the AI in practice (i.e. core deposits). Non-interest-bearing deposits (e.g. deposits in current accounts) are also included in NMDs. 31 In the current IRR return (see para. 27 of the Completion Instructions), managed rate liabilities (including NMDs) are slotted into the appropriate time bands according to the earliest date on which their interest rates can be adjusted. We propose that AIs retain this option, but can alternatively choose to slot them based on behavioural maturity according to the standardised framework below. 32 NMDs should first be segmented into retail and non-retail categories. Retail deposits should be considered as held in a transactional account when regular transactions are carried out in that account (e.g. when salaries are regularly credited) or when the deposit is non-interest bearing. Other retail deposits should be considered as held in a non-transactional account. 33 AIs should first identify stable NMDs, i.e. those that are found to remain undrawn with a high degree of likelihood, using observed volume changes over the past 10 years. AIs should then identify core deposits, which are stable NMDs that are unlikely to reprice even under significant changes in the interest rate environment. All other NMDs are non-core deposits. AIs are required to estimate the level of core deposits using this two-step procedure for each NMD category, subject to the caps in Table 3. 34 NMDs should finally be slotted into the appropriate time band. Non-core deposits should be considered as overnight deposits and accordingly should be placed into the overnight time band. Core deposits should be slotted according to their average behavioural maturity, which should be determined by AIs using an appropriate procedure subject to the caps in Table 3.

Cap on proportion of core deposits to total NMDs (%) Cap on average maturity of core deposits (years) Retail/transactional 90 5 Retail/non-transactional 70 4.5 Non-retail 50 4
Table 3
7.4 Automatic interest rate options
35 As described in Subsection 6, AIs should take into account the value of their interest rate options when calculating the standardised EVE risk measure. Under the standardised framework, interest rate options (also known as automatic interest rate options10) include both standalone options 11 and embedded options.12 Prepayment options on non-retail loans (see Subsection 7.1) and early redemption options on non-retail deposits or bonds (see Subsection 7.2) should also be treated as embedded options. We propose that all bought and sold interest rate options should be included in the calculation of the standardised EVE risk measure. 36 Following the BCBS framework, AIs should report the estimated value of the option contracts to the option holder (see Subsection 6), which are to be calculated according to the reporting AI's proprietary options pricing model. Under interest rate shock scenarios, the option values should be calculated using a full-revaluation approach, i.e. AIs should re-calculate the value of interest rate options by assuming:

• a yield curve in the given currency under the interest rate shock scenario 𝑖; and
• a relative increase in the implicit volatility of 25%.
  7.5 Off-balance sheet commitments
  37 The new BCBS standards included fixed rate loan commitments as a common product with behavioural optionality. These are commitments by banks to allow customers to draw down a loan or place a deposit at a fixed rate within a limited future period. Such commitments can also give rise to interest rate risk and therefore need to be taken into account in the management of IRRBB. 10 These are called automatic interest rate options because they will almost certainly be exercised if it is in the holder’s financial interest to do so. This is in contrast with behavioural options embedded implicitly or within the terms of financial contracts, such that changes in interest rates may affect the behaviour of the client. 11 For example, exchange-traded or over-the-counter option contracts. 12 These are explicitly embedded within the contractual terms of an otherwise standard financial instrument where the holder will almost certainly exercise the option if it is in their financial interest to do so. An example of a product with embedded options is a floating rate mortgage loan with embedded caps and/or floors.

38 We propose to require AIs to include fixed rate loan and fixed rate deposit commitments in the calculation of IRRBB exposures. Both retail and wholesale commitments should be included. While the HKMA will not provide a standardised methodology, AIs should estimate the proportion of commitments that will be drawn down and the expected tenor, based on historical data and using a sound and prudent methodology. The estimated cash flows should be reported in the off-balance sheet
section (item 15) of the IRR return, following the reporting method for forward
arrangements for fixed rate loans and fixed rate deposits.
8 Interest rate shock scenarios
39 Following the BCBS framework, the change in the risk-free interest rate ∆𝑟𝑖,𝑐(𝑘) for interest rate shock scenario 𝑖, currency 𝑐 and time band 𝑘 is proposed to be calculated according to the equations below (see Table 4 for values of �):
(i) parallel shock up:
∆𝑟1,𝑐(𝑘) = �𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝,𝑐
(ii) parallel shock down:
∆𝑟2,𝑐(𝑘) = − �𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝,𝑐
(iii) steepener shock:
∆𝑟3,𝑐(𝑘) = −0.65 ∙ �𝑠ℎ𝑜 𝑜,𝑐 ∙ 𝑒
− 𝑘
4 + 0.9 ∙ � 𝑙𝑙,𝑐 ∙ �1 − 𝑒
− 𝑘
4 �
(iv) flattener shock:
∆𝑟4,𝑐(𝑘) = 0.8 ∙ �𝑠ℎ𝑜 𝑜,𝑐 ∙ 𝑒
− 𝑘
4 − 0.6 ∙ � 𝑙𝑙,𝑐 ∙ �1 − 𝑒
− 𝑘
4 �
(v) short rates shock up:
∆𝑟5,𝑐(𝑘) = �𝑠ℎ𝑜 𝑜,𝑐 ∙ 𝑒
− 𝑘
(vi) short rates shock down:
∆𝑟6,𝑐(𝑘) = − �𝑠ℎ𝑜 𝑜,𝑐 ∙ 𝑒
− 𝑘
40 The BCBS framework allows national supervisors to set floors to the post-shock interest rates at their discretion. We propose to set a floor of −2%, so that the final post-shock interest rate is given by:
𝑟𝑖,𝑐(𝑘) = max�𝑟0,𝑐(𝑘) + ∆𝑟𝑖,𝑐(𝑘), −2%�

41 Table 4 will be updated from time to time based on parameter updates provided by the BCBS. AIs should contact the HKMA if they need to report a currency that is not in the table. Specified size of interest rate shocks ( �, in bps) ARS AUD BRL CAD CHF CNY CNH EUR Parallel 400 300 400 200 100 250 250 200 Short 500 450 500 300 150 300 300 250 Long 300 200 300 150 100 150 150 100 GBP HKD IDR INR JPY KRW MXN Parallel 250 200 400 400 100 300 400 Short 300 250 500 500 100 400 500 Long 150 100 350 300 100 200 300 RUB SAR SEK SGD TRY USD ZAR Parallel 400 200 200 150 400 200 400 Short 500 300 300 200 500 300 500 Long 300 150 150 100 300 150 300
Table 4
9 Other
9.1 Time bands and midpoints
42 The current IRR return has 15 time bands. We propose to use a more granular list of time bands (20 in total13), which can be found in Table 5. Each time band includes its upper limit but not its lower limit, e.g. the ‘3 to 4 years’ time band can be expressed as 3𝑦 < 𝑡 ≤ 4𝑦. 43 In the current IRR return, the time weight of each time band is calculated using 365 days in a year. Following the BCBS standards, we propose to use 360 days in a year, and calculate the time weights based on the midpoints of each time band (measured in years) as listed in Table 5. The detailed formula used to compute the time weights can be found in the Completion Instructions of the updated IRR return. 13 These include the 19 time bands from the BCBS standardised framework, plus an additional one (2 to 7 days) to be consistent with other HKMA returns.

Time band Midpoints Time band Midpoints
Next day or less 1
360 = 0.0028 3 to 4 years 3.5
2 to 7 days 4.5
360 = 0.0125 4 to 5 years 4.5
8 days to 1 month
360 = 0.0528 5 to 6 years 5.5
1 to 3 months 60
360 = 0.1667 6 to 7 years 6.5
3 to 6 months 135
360 = 0.375 7 to 8 years 7.5
6 to 9 months 225
360 = 0.625 8 to 9 years 8.5
9 to 12 months 315
360 = 0.875 9 to 10 years 9.5
1 to 1.5 years 1.25 10 to 15 years 12.5
1.5 to 2 years 1.75 15 to 20 years 17.5
2 to 3 years 2.5 More than 20 years 25
Table 5
44 The standardised framework requires AIs to slot the cash flows to time bands first, and then discount them using the interest rate at the midpoint of each time band. 14 For example, a 3.9-year loan will be discounted using the 3.5-year interest rate. The HKMA would like to seek the views of the industry on whether they would prefer to discount each cash flow using the interest rate that corresponds exactly to the timing of the cash flow, i.e. to discount a 3.9-year loan using the 3.9-year interest rate, etc. This might be less costly for AIs that already discount their cash flows this way in their risk management systems.
9.2 Coupon cash flows
45 In the current IRR return, only the notional principal of the positions need to be slotted into time bands. To be consistent with the BCBS standards, we propose that coupon payments should also be slotted from the economic value perspective. For fixed rate positions, coupon payments should be slotted into the appropriate time bands according to their payment schedule until the contractual maturity15. For 14 AIs will also have the option to slot cash flows onto time band midpoints rather than time bands when calculating the standardised EVE risk measure. This option requires splitting up notional repricing cash flows between two adjacent time band midpoints. For example, a 3.9-year loan will need to be split between the 3.5-year midpoint and the 4.5-year midpoint, and then discounted using the relevant interest rates. 15 In the case of cash flows with optionality (see Subsection 7), the cash flows slotted to each time band should be adjusted to take into account the expected prepayment or early withdrawal behaviour.

floating rate positions, coupon payments should be slotted into the appropriate time bands according to their payment schedule until the next repricing date. We propose to add a new column to the IRR return template where AIs should report net positions including coupon cash flows. 46 Regarding commercial margins and other spread components, AIs have an explicit choice to either include or exclude them in the cash flows. If institutions have chosen to include commercial margins and other spread components in the cash flows, the spread components must be slotted according to their payment schedule until the contractual maturity 16 , irrespective of whether the notional principal has been repriced or not, provided that the notional principal has not yet been repaid and that the spread components do not reprice. 47 The following example illustrates how coupon payments should be slotted for a floating rate loan with a notional amount of HKD 100 million. The loan expires after ten years and the interest rate is HIBOR+3% (payable annually). The current HIBOR is 2% and the next repricing date is in a year’s time. Including spread components Excluding spread components Next day or less:
2 to 7 days:
8 days to 1 month:
1 to 3 months:
3 to 6 months:
6 to 9 months:
9 to 12 months 5 2
1 to 1.5 years
1.5 to 2 years 3
2 to 3 years 3
3 to 4 years 3
4 to 5 years 3
5 to 6 years 3
6 to 7 years 3
7 to 8 years 3
8 to 9 years 3
9 to 10 years 3
10 to 15 years
15 to 20 years
More than 20 years
48 The example below shows how coupon payments should be slotted for a fixed rate loan with a notional amount of HKD 100 million. The loan expires after ten years. The 16 In the case of floating rate loans subject to prepayment risk, the spread components slotted to each time band should be adjusted to take into account the expected prepayment behaviour.

interest rate on the loan, payable annually, is 5% including spread components and 4% excluding spread components. Including spread components Excluding spread components Next day or less:
2 to 7 days:
8 days to 1 month:
1 to 3 months:
3 to 6 months:
6 to 9 months:
9 to 12 months 5 4
1 to 1.5 years
1.5 to 2 years 5 4
2 to 3 years 5 4
3 to 4 years 5 4
4 to 5 years 5 4
5 to 6 years 5 4
6 to 7 years 5 4
7 to 8 years 5 4
8 to 9 years 5 4
9 to 10 years 5 4
10 to 15 years
15 to 20 years
More than 20 years
9.3 Impact on earnings
49 Consistent with the BCBS framework, we propose to require AIs to report the impact on earnings under two interest rate shock scenarios: parallel up and parallel down (see Subsection 8). When computing the earnings impact, AIs are required to re-calculate the net positions, as they may vary under interest rate shock scenarios depending on the way cash flows with optionality are slotted (the net positions should be consistent with those used for EVE impact – see Subsection 7). Otherwise, the methodology for computing the earnings impact remains largely the same as in the current IRR return, with minor modifications reflecting the new time bands and time weights. IV OTHER AMENDMENTS 10 IRR return amendments
10.1 Reporting scope and frequency
50 We propose that locally incorporated AIs should report the return both on a solo basis (combined positions of local and overseas offices) and on a consolidated basis (where

applicable). Overseas incorporated institutions are required to report the positions of their Hong Kong operations only. The return should be submitted to the HKMA no later than six weeks after the end of each quarter.
10.2 Amendments to the IRR return template
51 The revised IRR return template (available on the HKMA website) does not show the tracked changes. For the ease of reference, the following is a list of proposed amendments to the IRR return template:

• More granular time bands
• New columns under Item 2 “Fixed rate assets”: “Residential mortgage loans
  subject to prepayment risk” and “Other assets subject to prepayment risk”.
• New columns under Item 6 “Fixed rate liabilities”: “Deposits subject to early
  redemption risk” and “Other liabilities subject to early redemption risk”.
• Replaced “Variable rate” with “Floating rate”.
• Rows A to T under Item 14 “Options” have been greyed out.
• New row under Item 18 “Economic value perspective”: “Options”.
• New columns under Item 16 “Net positions”: “Excluding coupon cash flows” and
  “Including coupon cash flows”.
• Item 17a “Time weight on earnings” and 18a “Weighting factor for standardised
  interest rate shock” will be replaced by a single item 17a “Time band midpoint (years)”. AIs should calculate the appropriate time weights based on the time band midpoints, according to the Completion Instructions in the updated IRR return.
• New column under Item 17 “Earnings perspective”: Impact on earnings over the
  next 12 months (parallel down).
• New columns under Item 18 “Economic value perspective” for the current EVE
  and the impact on EVE under each of the six interest rate shock scenarios.
  10.3 Other
  52 We updated the example calculation in Annex 1, and deleted Annex 2 and Annex 3. 11 SPM amendments 53 Following the BCBS framework, we made a number of updates to the IRRBB management principles in the SPM, such as factors to be considered when developing stress-testing scenarios and assessing capital adequacy for interest rate risk as part of the CAAP. We also updated the BCBS principles for the management of IRRBB in

Annex A, and added a list of factors influencing the exercise of behavioural options in
Annex B. The original Annex B and Annex C are deleted. Additionally, we made a
number of changes in the title and main text of the SPM to clarify that the main focus of the SPM is on interest rate risk in the banking book. Detailed changes can be found in the revised SPM on the HKMA website. 12 Public disclosure 54 According to the BCBS standards, banks should disclose their interest rate risk exposures to the public on an annual basis. We plan to implement this disclosure requirement as part of the second phase of the BCBS Pillar 3 review. The timing of the implementation of the BCBS Pillar 3 review in Hong Kong will be communicated to AIs separately in due course. 13 Supplementary IRR return 55 The return of “MA(BS)12(i) – Interest Rate Risk Exposures (Supplementary Information)”17 (supplementary IRR return) collects supplementary information on the weighted average interest costs of interest bearing liabilities denominated in Hong Kong dollars of AIs on a monthly basis. The reporting items are the same as those of interest bearing and noninterest bearing liabilities in Hong Kong dollars in the current IRR return. The information collected in the supplementary IRR return will be used for the compilation of the monthly composite interest rate for Hong Kong, which aims to provide an overall picture of the average interest cost of funds in the banking sector, and its changes over time. 56 Given that the supplementary IRR return is primarily used for statistical purposes, we plan to keep the existing layout of the supplementary IRR return. In addition, for locally incorporated AIs, the supplementary IRR return will continue to be reported on a solo basis. However, the definition of reporting items 18 and the methodology for slotting of cash flows should be consistent between the IRR return and the supplementary IRR return. 57 Reflecting the above, we have revised the Completion Instructions of the supplementary IRR return, which can be found on the HKMA website at www.hkma.gov.hk/eng/key-functions/banking-stability/basel-3/consultation_on_impl ementation_of_irrbb.shtml. 17 www.hkma.gov.hk/eng/key-functions/banking-stability/banking-policy-and-supervision/regulatory-framework/12i.shtml 18 For example, non-remunerated deposits will need to be reported under interest bearing liabilities as in the IRR return.

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Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion This module should be read in conjunction with the Introduction and with the Glossary, which contains an explanation of abbreviations and other terms used in this Manual. If reading on-line, click on blue underlined headings to activate hyperlinks to the relevant module. ————————— Purpose To set out the approach which the HKMA will adopt in the supervision of interest rate risk in the banking book (IRRBB) and in monitoring AIs' level of interest rate riskIRRBB exposures Classification A non-statutory guideline issued by the MA as a guidance note Previous guidelines superseded This is a new guideline.IR-1 “Interest Rate Risk Management” (V.1) dated 13.12.2002 Application To all AIs Structure

1. Introduction
   1.1 Terminology
   1.2 Background
   1.3 Scope
2. Sources of interest rate riskIRRBB
   2.1 Summary
   2.2 Repricing (or maturity mismatch) Gap risk
   2.3 Yield curve risk
   2.4 Basis risk
   2.54 Option risk
   2.5 Credit spread risk
3. Effects of interest rate riskIRRBB
   3.1 Summary

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IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
3.2 Earnings perspective
3.3 Economic value perspective
3.4 Embedded losses
4. Supervisory approach to interest rate riskIRRBB
4.1 Objectives and process
4.2 Basel Committee principles
4.3 Factors to be considered
4.4 Monitoring of interest rate riskIRRBB (earnings
approach)
4.5 Review of capital adequacy (economic value approach)
4.6 Criteria for adequate internal systems
5. Standardised framework for measuring IRRBB exposure
5.1 Standardised EVE risk measure
5.2 Slotting cash flows with optionality
5.3 Standardised interest rate shock scenarios
56. Oversight by AIs
56.1 Responsibilities of Board and senior management
56.2 Asset and Liability Management Committee
56.3 Independent risk management
67. Risk management policies, procedures and controls
67.1 Coverage
67.2 New services and strategies
67.3 Risk measurement, monitoring and control
67.4 Stress-testing
67.5 Limits
67.6 Internal controls and independent audits
Annex A : Basel principles for the management of interest rate
riskIRRBB
B: Factors influencing behavioural optionality B : Interest rate risk measurement techniques C : A simulation model of net interest income

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion —————————

1. Introduction
   1.1 Terminology
   1.1.1 In this module
    "interest rate riskIRRBB" means the risk to an AI’s financial condition resulting from adverse movements in interest rates that affect the AI’s banking book positions; and  "OBS" means off-balance sheet.
   1.2 Background
   1.2.1 AIs' normal activities of lending, taking deposits with
   differing maturities and interest rates and buying securities may expose them to interest rate riskIRRBB.
   1.2.2 Interest rate risk may apply to the banking book as well
   as the trading book.
   1.2.32 While accepting some interest rate riskIRRBB is inherent
   in banking business, excessive interest rate riskIRRBB can pose a significant threat to AIs' earnings and capital adequacy. AIs should therefore have a process to identify, measure, monitor and manage control interest rate riskIRRBB in a timely and comprehensive fashion.
   1.3 Scope
   1.3.1 This module:
    provides guidance on the processes for effective interest rate riskIRRBB management;  aims to help AIs evaluate the adequacy and effectiveness of their interest rate riskIRRBB management; and  sets out how the HKMA monitors and supervises AIs' level and management of interest rate riskIRRBB.
   1.3.2 The main focus of this module is on the management
   and measurement of interest rate risk in the banking book, although the HKMA will also take into account an AI’s exposures in the trading book in evaluating the overall complexity and level of its interest rate risk. Sound practices for the management and measurement

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion of interest rate risk in the trading book are covered in TA-1 “Market Risk Management”1 and TA-3 “Management of Trading in Derivatives and Other Instruments”1 . For locally incorporated AIs that are exempted from the market risk capital adequacy regime 1 and overseas incorporated AIs, this module applies to their positions in both the banking book and the trading book.
1.3.3 This module should be read in conjunction with IC-1
“General Risk Management Controls”2
. The criteria and sound practices for general risk management contained therein are also applicable to effective interest rate riskIRRBB management.
2. Sources of interest rate riskIRRBB
2.1 Summary
2.1.1 The following subsections describe the primary forms of
interest rate riskIRRBB faced by AIs. They can be divided into four three broad categories:
 repricing (or maturity mismatch) risk;
 yield curvegap risk;
 basis risk; and
 option risk.
2.1.2 Repricing risk Gap risk and basis risk, in particular, are
the major sources of risk underlying the interest rate riskIRRBB exposures of AIs that are active in retail banking activities.
2.2 Repricing (or maturity mismatch)Gap risk
2.2.1 Gap risk is the risk arising from changes in the interest
rates on instruments of different maturities. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (non￾parallel risk).Repricing risk is caused by timing differences in rate changes and cash flows that occur in the repricing and maturity of fixed and floating rate

1 Details of the market risk capital adequacy regime and the de minimis exemption criteria as well as the requirements relevant to exempted AIs are set out in the Banking (Capital) Rules. 2 Module under development.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion assets, liabilities and OBS instruments. It is the most obvious source of interest rate risk for an AI.
2.2.2 Repricing Parallel risk is fundamental to banking
business and some AIs may take on this risk in their balance sheet as part of their strategy to improve earnings. It can, however, affect the income and economic value of an AI as interest rates fluctuate. For example, an AI that has funded a long-term fixed rate loan with a short-term deposit could face a decline in future income if interest rates increase. This is because the cash flows from the loan are fixed while interest payable on replacement funding will be higher after the short-term deposit matures.
2.2.3 Non-parallel risk materialises when unanticipated
changes in the shape of the yield curve have adverse effects on an AI’s income or economic value. As an example, the economic value of an AI’s long position in ten-year government bonds hedged by a short position in five-year government bonds could decline sharply if the yield curve steepens, even if the position is hedged against parallel movements in the yield curve.For example, an AI that has funded a long-term fixed rate loan with a short-term deposit could face a decline in future income arising from the positions and their values if interest rates increase. This is because the cash flows from the loan are fixed while interest payable on replacement funding will be higher after the short-term deposit matures.
2.3 Yield curve risk
2.3.1 Repricing mismatches can expose an AI to changes in both the
overall level of interest rates (parallel shifts in the yield curve) and the relative level of rates across the yield curve (non-parallel shifts in the yield curve, e.g. steepening or flattening yield curves). Yield curve risk materialises when unanticipated changes in the yield curve have adverse effects on an AI’s income or economic value.
2.3.2 As an example, the economic value of an AI’s long position in
ten-year government bonds hedged by a short position in five￾year government bonds could decline sharply if the yield curve steepens, even if the position is hedged against parallel movements in the yield curve.
2.4 Basis risk

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IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
2.43.1 Basis risk arises from imperfect correlation between
changes in the rates earned and paid on different instruments with otherwise similar repricing characteristics. As a result of these differences, the cash flows and earnings spread between assets, liabilities and OBS instruments of similar maturities or repricing frequencies will change.
2.43.2 For example, an AI may have mortgage loans priced at a
different rate to that for its funding, e.g. priced at the prime rate and funded by HIBOR. HIBOR may rise while the prime rate remains unchanged. The AI has the option of increasing its prime rate but in practice its scope to do so may depend on whether other AIs will do the same.
2.43.3 This scenario affects the AI’s current net interest margin
through changes in the spread between earnings and payments on instruments that are being repriced. It will also affect future cash flows from these instruments, which will in turn affect the economic value of the AI.
2.54 Option risk
2.54.1 Option risk arises from interest rate option derivatives or
from optional elements embedded in an AI’s assets, liabilities and/or OBS instruments, where the AI or its customer can alter the level and timing of their cash flows. Option risk can be further characterised into automatic option risk and behavioural option risk.The options embedded in many AIs' assets, liabilities and OBS portfolios pose an additional and increasingly important source of interest rate risk. Options may be stand-alone instruments such as exchange-traded bond options and over-the-counter contracts such as caps and floors or they may be embedded within otherwise standard instruments.
2.54.2 Automatic option risk arises from standalone
instruments, such as exchange-traded and over-the￾counter option contracts, or options explicitly embedded within an otherwise standard financial instrument (e.g. a capped rate loan), where the option will almost certainly be exercised if it is in the holder’s financial interest to do so.Embedded options include various types of bonds and notes with call or put provisions, loans which give borrowers the right to prepay outstandings (e.g. in some syndicated lending) and various types of demand

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion deposits which give depositors the right to withdraw funds at any time, often without any penalty.
2.54.3 Behavioural option risk arises from the flexibility
embedded implicitly or within the terms of financial contracts, such that changes in interest rates may affect the behaviour of the client. For example, Tthe early repayment of residential mortgage and commercial loans by customers is as if an AI had written an option to the customers. If the spread over the reference rate, or the mortgage rate offered by other AIs, is lower, customers may prepay a mortgage loan, notwithstanding any applicable penalties. Conversely, customers will leave their loans outstanding if the spread rises. Both scenarios will reduce AIs' potential future earnings. Similarly, AIs may experience a higher proportion of fixed rate loan commitments to be drawn down when the spread increases, and vice versa.
2.54.4 On the deposit side, customers can generally withdraw
early. Early withdrawal rights are equivalent to put options on deposits. If rates increase, the market value of customer deposits declines and customers may withdraw them and place them with the same AI, or a different one, at a higher rate. Another common product with behavioural optionality is non-maturity deposits (NMDs) which can be withdrawn at any time without notice, but a portion of which tend to remain with the AI in practice (i.e. core deposits).
2.5 Credit spread risk
2.5.1 While the three sources of risks listed above are directly
linked to IRRBB, credit spread risk in the banking book (CSRBB) is a related risk that AIs need to monitor and assess in their interest rate risk management framework. CSRBB refers to any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB or by the expected credit risk or jump to default risk.
3. Effects of interest rate riskIRRBB
3.1 Summary
3.1.1 As described in section 2 above, changes in interest
rates can have adverse effects both on an AI’s earnings and economic value. Its interest rate riskIRRBB exposure can therefore must be assessed from two

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion separate but complementary perspectives, i.e. earnings and economic value.
3.2 Earnings perspective
3.2.1 In this traditional approach to interest rate riskIRRBB
assessment, the analysis focuses on the impact of changes in interest rates on accruing or reported earnings. Reduced earnings or outright losses can threaten the financial stability of an AI by undermining its capital adequacy and by reducing market confidence in it.
3.2.2 The component of earnings that usually receives most
attention is net interest income (NII), i.e. the difference between total interest income and total interest expense, taking account of hedging activity (e.g. via derivatives). Net interest income is important for AIs' overall earnings and has a direct, obvious link to changes in interest rates. Net interest income will vary because of differences in the timing of accrual changes (repricing risk), changing rate and yield curve relationships (basis and yield curve risks) and option positions.This focus reflects both the importance of NII in AIs’ overall earnings and its direct link to changes in interest rates.
3.2.3 Market interest rate changes can also have an impact on
banking activities that generate fee-based and other non￾interest income. Non-interest income arising from many activities such as loan servicing and asset securitisation programmes can be highly sensitive to market interest rates.
3.3 Economic value perspective
3.3.1 Variations in market interest rates can affect the
economic value of an AI's assets, liabilities and OBS positions. The economic value of an instrument represents an assessment of the present value of its expected net cash flows, discounted to reflect market rates. As fluctuations in interest rates will affect an AI's earnings, they will also affect its net worth.
3.3.2 The economic value perspective reflects this sensitivity.
It provides a more comprehensive view of the potential long-term effects of changes in interest rates than is offered by the earnings perspective. In contrast, changes in short-term earnings, the typical focus of the earnings

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion perspective, may not provide an accurate indication of the impact of interest rate movements on an AI’s overall positions.
3.4 Embedded losses
3.4.1 An AI should also consider the impact that past interest
rates may have on future performance. Instruments that are not marked-to-market may already contain embedded gains or losses due to past rate movements. These gains or losses may be reflected over time in the AI's earnings. For example, a long-term fixed rate loan entered into when interest rates were low will result in an embedded loss when its funding is subsequently replaced by liabilities bearing higher interest rates over the remaining life of the loan. This embedded loss will be materialised over time until the loan is settled.
4. Supervisory approach to interest rate riskIRRBB
4.1 Objectives and process
4.1.1 The HKMA adopts a risk-based supervisory approach
which enables continuous supervision of AIs’ interest rate riskIRRBB through a combination of on-site examinations, off-site reviews and prudential meetings. The objective is to assess the adequacy and effectiveness of an AI's interest rate riskIRRBB management process, the level and trend of the AI's risk exposure and, in the case of a locally incorporated AI, the adequacy of its capital relative to the size of its exposure. See SA-1 "Risk-based Supervisory Approach" for details of the HKMA’s risk-based supervisory methodology.
4.1.2 AIs are required to submit timely and comprehensive
information on their interest rate riskIRRBB exposures through the “Return of Interest Rate Risk Exposures – MA(BS)12” (“Interest Rate RiskIRR Return”) on a quarterly basis. The HKMA uses this Return to evaluate AIs’ level of interest rate riskIRRBB based on both the earnings approach and the economic value approach (see subsections 4.4 and 4.5 below for more details). The information collected takes appropriate account of the range of maturities and currencies in each AI's portfolio, including OBS items, as well as other relevant factors such as basis risk.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
4.1.3 Locally incorporated AIs that are exempted from the
market risk capital adequacy regime 3 and overseas incorporated AIs are required to report in the Interest Rate RiskIRR Return the aggregate of their interest rate risk exposures in the trading book and banking book. Where necessary, the HKMA may request individual overseas incorporated AIs that have material trading positions to comply with additional reporting requirements in order to distinguish between their trading and non-trading activities for monitoring purposes.
4.1.4 Locally incorporated AIs that are subject to the market
risk capital adequacy regime are only required to report their interest rate risk exposures in the banking book in the Interest Rate RiskIRR Return as their trading positions in interest rate risk are monitored through the “Return of Capital Adequacy Ratio – MA(BS)3Return of Market Risk Exposures - MA(BS)3A” (“Market Risk Return”).
4.1.5 The HKMA will discuss with an AI's management to
identify the major sources of the AI's interest rate riskIRRBB exposures and evaluate whether its measurement systems can identify and quantify adequately such risk exposures. The HKMA will also analyse the integrity and effectiveness of the AI's interest rate riskIRRBB management process to ensure that its practices comply with the objectives and risk tolerance limits approved by the Board of Directors.
4.1.6 In considering whether an AI has appropriate systems for
managing interest rate riskIRRBB, the HKMA will have regard to the nature and complexity of the AI’s interest rate riskIRRBB exposures and its compliance with the standards and sound practices set out in IC-1 “General Risk Management ControlsRisk Management Framework” and this module.
4.2 Basel Committee principles
4.2.1 The supervisory approach to interest rate riskIRRBB set
out in this module is based on the principles and practices expounded in the Basel Committee paper of September 1997April 2016, "Interest rate risk in the

3 Details of the market risk capital adequacy regime and the de minimis exemption criteria as well as the requirements relevant to exempted AIs are set out in CA-G-2 “Maintenance of Adequate Capital Against Market Risk”.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion banking bookPrinciples for the Management of Interest Rate Risk". Details of the principles are listed in Annex A.
4.3 Factors to be considered
4.3.1 In assessing the safety and soundness of an AI’s interest
rate riskIRRBB management and exposures, the HKMA will consider:
 the complexity and level of risk posed by its assets, liabilities and OBS activities, including both trading and non-trading sources;  the adequacy and effectiveness of Board and senior management oversight;  management's knowledge and ability to identify and manage sources of interest rate riskIRRBB;  the adequacy of and compliance with risk management policies and procedures;internal validation of IRRBB measures, including sensitivity analysis and backtesting, in particular where changes in key parameters have occurred;  the adequacy of internal measurement, monitoring and management information systems;  the adequacy and effectiveness of risk limits on and controls over income and capital losses;  the effectiveness of the AI’s IRRBB stress testing programme;  the adequacy of the AI's internal review and audit of its interest rate risk management process;  the adequacy and effectiveness of the AI's risk management practices and strategies, as evidenced from past and projected financial performance;  the effectiveness of hedging strategies used by the AI to control IRRBB; and  the appropriateness of the AI's level of interest rate riskIRRBB in relation to its earnings, capital and risk management systems.
4.3.2 These topics are discussed further in sections 56 and 67
below.

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IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
4.4 Monitoring of interest rate riskIRRBB (earnings approach)
4.4.1 The HKMA reviews the level and trend of AIs’ interest
rate riskIRRBB exposures using the quarterly Interest Rate RiskIRR Return. The Return collects information on the following:
 the repricing positions of interest bearing assets, interest bearing liabilities and OBS positions by different time bands and currencies (i.e. Hong Kong dollar, US dollar and any other major foreign currency that accounts for 5% or more of an AI’s total on-balance sheet assets in all currencies);  a breakdown of interest bearing assets and liabilities into fixed rate, variable floating rate and managed rate items 4 which have different repricing features and reference rates;  the repricing positions of residential mortgage loans and deposits, which are the major components of AIs’ interest bearing assets and liabilities respectively;  the weighted average yield and interest costs of interest bearing assets and liabilities, which provide more information for analysing AIs’ net interest income; and  a breakdown of the major types of OBS positions (e.g. interest rate swaps, cross currency swaps and options).  the impact of interest rate shock scenarios on economic value of equity (EVE) and earnings
4.4.2 AIs are allowed to use behavioural maturityshould follow
the Completion Instructions for the purpose of reporting interest rate risksIRRBB in the Interest Rate RiskIRR Return if they can satisfy the minimum criteria set out in the Completion Instructions. The HKMA may request additional information on those positions where the

Fixed rate items are those assets and liabilities with interest rates fixed up to their final maturities. Variable Floating rate items are those which will automatically be repriced at the next repricing date during the life of the items in accordance with movements in the relevant "reference rates" (such as HIBOR) and include those items for which the interest rates can be varied at the discretion of the counterparty. Managed rate items are those variable rate items (e.g. mortgage loans and savings non-maturity deposits) for which there are no fixed repricing dates and the interest rates can be adjusted at any time at the discretion of the reporting AI.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion behavioural maturity is different from the contractual maturity. It may also review AIs’ internal processes and assumptions for determining the behavioural maturity of interest rate risk positions in their portfolios.
4.4.3 Based on the reported interest rate repricing positions in
the Interest Rate RiskIRR Return, the HKMA assesses the impact on an AI’s earnings over the next 12 months if the interest rates change by 200 basis pointsbased on two standardised interest rate shock scenarios (parallel up and parallel down) as set out in subsection 5.3. The HKMA will be particularly attentive to those AIs whose repricing riskIRRBB leads to a significant decline in earnings having regard to the nature and complexity of their activities.
4.4.4 As basis risk is a major risk factor underlying AIs’ interest
rate riskIRRBB exposures, the HKMA assesses the impact of changes in the relationships between key market rates on AIs’ earnings using two hypothetical stress scenarios set out in the Interest Rate RiskIRR Return. They are:
 all rates except for fixed and managed rates (e.g. the prime rate) on interest bearing assets rise by 200 basis points; and  managed rates on interest bearing assets drop by 200 basis points while other rates remain unchanged. The changes are assumed to last for one month, three months, six months and 12 months respectively. The HKMA will be particularly attentive to those AIs whose basis risk leads to a significant decline in earnings having regard to the nature and complexity of their activities.
4.4.5 Where an AI has significant exposures to repricing gap
risk or basis risk, the HKMA may review information from the AI’s internal management reports such as maturity/repricing gaps, earnings and economic value simulation estimates and the results of stress tests conducted. The HKMA will also discuss with the AI's management to evaluate its strategy for managing those exposures and assess its capacity to absorb the risk of loss. Depending on the circumstances of each case, the AI may be asked to strengthen its capital position or

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion reduce its interest rate riskIRRBB (through, for example, hedging or restructuring existing positions) if necessary.
4.5 Review of capital adequacy (economic value approach)
4.5.1 Capital has an important role to play in mitigating and
absorbing the risk of loss from changes in interest rates.
As part of sound management, AIs should incorporate the level of interest rate riskIRRBB they undertake, whether arising from their trading or non-trading activities, into their overall evaluation of capital adequacy. Where AIs undertake significant interest rate riskIRRBB in the course of their business, an appropriate amount of capital should be allocated specifically to support this risk.
4.5.2 The HKMA expects locally incorporated AIs to maintain
adequate capital for the risks they undertakeIRRBB and to develop their own processes for internal assessment of capital adequacy.. As regards interest rate risk in the trading book, they are required to provide capital in accordance with the methodology set out in the Market Risk Return 5 .
4.5.3 While no capital charges are currently required for
interest rate risk in the banking book 6
, the HKMA will evaluate whether an AI has adequate capital to support its level of interest rate risk exposures and the risk those exposures may pose to its future financial performance. Specifically, locally incorporated AIs should consider their capital adequacy for IRRBB as part of the capital adequacy assessment process (CAAP, see CA-G-5 “Supervisory Review Process”), taking into account the following:
 the size and tenor of internal limits on IRRBB, and whether they have been reached;  the effectiveness and expected cost of open hedging positions;

Those AIs that fulfil the de minimis exemption criteria and other relevant requirements set out in CA-G-2 “Maintenance of Adequate Capital Against Market Risk”the Banking (Capital) Rules are exempted from the market risk capital adequacy regime. However, they are required to report their market risk exposures in the Market Risk Return annually for the HKMA’s monitoring purposes. The Basel Committee on Banking Supervision has concluded that no explicit capital requirements should be set for interest rate risk in the banking book in the New Basel Capital Accord but supervisors will be required to take account of a bank's interest rate risk under Pillar 2 (supervisory review process).

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion  the sensitivity of IRRBB measures to key assumptions;  basis risk;  the impact on economic value and earnings of mismatched positions in different currencies;  the impact of embedded losses;  the distribution of capital relative to risks across legal entities in the consolidation group;  the drivers of the underlying risk; and  the circumstances under which the risk might crystallise.
4.5.43 The HKMA will evaluate whether an AI has adequate
capital to support its level of IRRBB exposures and the risk those exposures may pose to its future financial performance. To facilitate the monitoring of an AI’s interest rate riskIRRBB and its capital adequacy, the HKMA models a standardised 200-basis-point parallel rate shocksix interest rate shock scenarios to the AI’s interest rate riskIRRBB exposures as reported in the Interest Rate RiskIRR Return, and measures the economic valueEVE impact of the shocks using the standardised framework (see section 5).
4.5.54 The HKMA will be particularly attentive to the capital
sufficiency of “outlier AIs” – those whose interest rate riskIRRBB leads to an economic valueEVE decline of more than 2015% of their capital baseTier 1 capital as a result of applying one of the six standardised interest rate shocks to the banking book 7 .
4.5.65 Where the HKMA is of the view that an AI’s level of
interest rate riskIRRBB exposures is high in relation to its capital, the HKMA will discuss the concern with the AI’s management. Depending on the circumstances of each case, the AI may be asked to strengthen its capital position or reduce its interest rate riskIRRBB (through, for example, hedging or restructuring existing positions). The AI may also be subject to additional reporting requirements for its interest rate riskIRRBB exposures.

For locally incorporated AIs which are exempted from the market risk capital adequacy regime, the HKMA will have regard to their positions in both the banking book and trading book.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion However, the AI may not need to take any action if it can demonstrate that its outlier status results from the AI’s specific IRRBB profile that is not adequately captured by the standardised framework and that the AI’s firm￾specific internal model would be able to better reflect its actual IRRBB exposure.
4.5.76 While overseas incorporated AIs are not subject to the
capital adequacy regime in Hong Kong, the HKMA uses the standardised interest rate shocks to monitor their interest rate riskIRRBB in terms of economic value. In view of the limitations of the earnings approach, the economic value approach provides supplementary information about the impact of interest rate movements on an AI’s overall positions (see para. 3.3.2 above).
4.5.87 In monitoring the impact of the standardised interest rate
shock on the economic value of overseas incorporated AIs, the HKMA will have regard to the capital baseTier 1 capital of their head office. Nevertheless, the 2015% benchmark mentioned in para. 4.5.5 4 above will not apply.
4.6 Criteria for adequate internal systems
4.6.1 The HKMA will assess whether an AI's internal
measurement system for interest rate riskIRRBB is adequate for managing risk in a safe and sound manner and for evaluation of its capital adequacy 8 in the case of a locally incorporated AI.
4.6.2 An AI’s interest rate riskIRRBB management system
should meet the criteria set out in subsection 67.3 below.
The system should be integrated into the AI's daily risk management practices and its output should be used in reporting the level of interest rate riskIRRBB to the Board of Directors and senior management and, where appropriate, individual business line managers. The system should be capable of measuring risk under both the earnings approach. Depending on the scale and complexity of its activities, the AI may also need to measure risk based on and the economic value approach.
4.6.3 The HKMA will require AIs to bring their internal
measurement system up to standard if deficiencies are

But it is the AI's responsibility to ensure that its capital is adequate.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion identified. Until the HKMA is satisfied that an AI's measurement system is adequate, it may require the AI concerned to increase the frequency of reporting, to supply additional information and to keep its exposures within more prudent limits.
5. Standardised framework for measuring IRRBB exposure
5.1 Standardised EVE risk measure
5.1.1 The calculation of the standardised EVE risk measure
involves the following key steps:
 For a given currency 𝑐 and time band 𝑘, calculate the net position 𝐶𝐹0,𝑐 (𝑘) (and 𝐶𝐹𝑖,𝑐 (𝑘) under interest rate shock scenario 𝑖) by slotting cash flows into time bands based on their earliest interest rate repricing dates, both under current conditions and under each of the six interest rate shock scenarios (see subsection 5.3). Both notional principals and coupon cash flows should be slotted. Note that the net position under interest rate shock scenarios may vary depending on the way cash flows with optionality are slotted (see subsection 5.2).  For each scenario 𝑖, calculate the impact on EVE (∆𝐸𝑖,𝑐 (𝑘)) for a given currency and time band as ∆𝐸𝑖,𝑐 (𝑘) = 𝐶𝐹0,𝑐 (𝑘) ∙ exp(−𝑟0,𝑐 (𝑘) ∙ 𝑡𝑘) − 𝐶𝐹𝑖,𝑐 (𝑘) ∙ exp(−𝑟𝑖,𝑐 (𝑘) ∙ 𝑡𝑘), where 𝑟0,𝑐 (𝑘) denotes the current risk-free rate9 (at the midpoint of the time band), 𝑟𝑖,𝑐 (𝑘) denotes the risk-free rate under scenario 𝑖 (at the midpoint of the time band) and 𝑡𝑘 denotes the midpoint of each time band 𝑘 (measured in years).  Calculate the interest rate option risk measure 𝐾𝐴𝑂𝑖,𝑐 under each scenario 𝑖 as the current net value of interest rate options10 (𝑉𝐴𝑂0,𝑐 ) minus the net value of interest rate options under the interest rate shock scenario ( 𝑉𝐴𝑂𝑖,𝑐 ), i.e. 𝐾𝐴𝑂𝑖,𝑐 =

This may be determined, for example, based on a secured interest rate swap curve. 10 This includes both bought and sold options and should be estimated according to the reporting AI's proprietary options pricing model.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion 𝑉𝐴𝑂0,𝑐 − 𝑉𝐴𝑂𝑖,𝑐 . The net value of interest rate options under the interest rate shock scenario should be calculated using the new yield curve under scenario 𝑖 , and assuming a relative increase in the implicit volatility of 25%.  Calculate the impact on EVE across all time bands for a given currency and scenario as ∆𝐸𝑖,𝑐 = 𝑚𝑎𝑥(0, ∑ ∆𝐸𝑖,𝑐 (𝑘) 𝑘 + 𝐾𝐴𝑂𝑖,𝑐).  Repeat the above for all applicable currencies. The aggregate EVE risk measure (∆𝐸) across all applicable currencies is calculated as the maximum loss across the six interest rate shock scenarios:
∆𝐸 = max
𝑖∈{1,2,…,6}
(∑∆𝐸𝑖,𝑐
𝑐
)
5.1.2 Cash flows should generally be slotted into time bands
according to the earliest interest repricing date. However, there is a separate methodology for slotting cash flows with optionality, including retail fixed rate loans subject to prepayment risk, retail term deposits subject to early redemption risk and non-maturity deposits – see subsection 5.2 for details.
5.2 Slotting cash flows with optionality
5.2.1 Retail fixed rate loans subject to prepayment risk
 Fixed rate loans subject to prepayment risk are fixed rate loan products where the full economic cost of prepayments cannot be charged, or charged only for prepayments above a certain threshold, to the borrower.  This section applies to retail fixed loans only. Retail loans are defined as loans satisfying the criteria in section 64(1)(a) and 64(1)(b) of the Banking (Capital) Rules. Non-retail fixed loans subject to prepayment risk should be considered as positions with embedded interest rate options.  AIs should determine, using own estimates, the baseline conditional prepayment rate 𝐶𝑃𝑅0,𝑐,𝑝 for a given portfolio 𝑝 of homogeneous loan products subject to prepayment risk denominated in a given

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion currency 𝑐, under the prevailing term structure of interest rates.11 The conditional prepayment rate under interest rate shock scenario 𝑖 is then given by:
𝐶𝑃𝑅𝑖,𝑐,𝑝 = min(1, 𝛾𝑖
∙ 𝐶𝑃𝑅0,𝑐,𝑝) where 𝐶𝑃𝑅0,𝑐,𝑝 is the (constant) baseline CPR and 𝛾𝑖 is a multiplier for scenario 𝑖 as given in the table below. Scenario number (𝑖) Interest rate shock scenarios 𝛾𝑖 (scenario multiplier) 1 Parallel up 0.8 2 Parallel down 1.2 3 Steepener 0.8 4 Flattener 1.2 5 Short rate up 0.8 6 Short rate down 1.2  The prepayments on the fixed rate loans can be broken down to scheduled payments adjusted for prepayment and uncompensated prepayments. The cash flows to be slotted into time band 𝑘 is given by:
𝐶𝐹𝑖,𝑐,𝑝
(𝑘) = 𝐶𝐹𝑆,𝑐,𝑝
(𝑘) + 𝐶𝑃𝑅𝑖,𝑐,𝑝 ∙ 𝑁𝑂𝑖,𝑐,𝑝
(𝑘 − 1) where 𝐶𝐹𝑆,𝑐,𝑝
(𝑘) refers to the scheduled interest payment 12 and principal repayment, and 𝑁𝑂𝑖,𝑐,𝑝 (𝑘 − 1) denotes the notional outstanding at the end of the previous time band. 13 AIs should repeat the above for each loan portfolio and currency to calculate the aggregate position in each time band.
5.2.2 Retail term deposits subject to early redemption risk

11 The base 𝐶𝑃𝑅 may vary over the life of the loan. In this case, it is denoted 𝐶𝑃𝑅0,𝑐,𝑝,𝒌 . 12 The scheduled interest payment should only be included when reporting net positions including coupon cash flows. 13 For simplicity, it is assumed that there is no annual limit on prepayments. If an AI has an annual limit on uncompensated prepayments, this limit will apply.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion  Term deposits subject to early redemption risk are term deposits that can be withdrawn early at the discretion of the customer. Term deposits may only be treated as a standard fixed rate deposit and be slotted into the time band according to their contractual maturity dates if o the depositor has no legal right to withdraw the deposit; or o an early withdrawal results in a significant penalty that at least compensates for the loss of interest between the date of withdrawal and the contractual maturity date and the economic cost of breaking the contract.14 If neither of these conditions is met, the depositor holds an option to withdraw and the term deposits are deemed to be subject to early redemption risk.  This section applies to retail term deposits subject to early redemption risk only. Retail deposits are defined as deposits placed with a bank by individual persons. Deposits made by small business customers, as defined in Rule 39 of the Banking (Liquidity) Rules, can also be treated as retail deposits. Deposits from legal entities, sole proprietorships or partnerships should be categorised as non-retail deposits. Non-retail term deposits subject to early redemption risk should be considered as positions with embedded interest rate options.  For each homogeneous portfolio 𝑝 of term deposits in a given currency 𝑐, AIs must determine the baseline term deposit redemption ratio 𝑇𝐷𝑅𝑅0,𝑐,𝑝 and use it to slot the notional repricing cash flows. Term deposits which are expected to be redeemed early should be slotted into the overnight time band (𝑘 = 1).

14 The economic cost of breaking the contract is the additional funding cost the AI would incur due to the early redemption, assuming the AI obtained term funding at the current interest rate, or the interest rate under the relevant interest rate shock scenario, to cover the remaining life of the original term deposit.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion  The term deposit redemption ratio for time band 𝑘 under scenario 𝑖 is obtained by multiplying 𝑇𝐷𝑅𝑅0,𝑐,𝑝 by a scalar 𝑢𝑖 as follows:
𝑇𝐷𝑅𝑅𝑖,𝑐,𝑝 = min(1, 𝑢𝑖
∙ 𝑇𝐷𝑅𝑅0,𝑐,𝑝) where the values of the scalars 𝑢𝑖 are set out in the table below. Scenario number (𝑖) Interest rate shock scenarios u𝑖 (scenario multiplier) 1 Parallel up 1.2 2 Parallel down 0.8 3 Steepener 0.8 4 Flattener 1.2 5 Short rate up 1.2 6 Short rate down 0.8  The notional repricing cash flows which are expected to be withdrawn early under interest rate shock scenario 𝑖 are given by:
𝐶𝐹𝑖,𝑐,𝑝
(1) = 𝑇𝐷0,𝑐,𝑝 ∙ 𝑇𝐷𝑅𝑅𝑖,𝑐,𝑝 where 𝑇𝐷0,𝑐,𝑝 is the outstanding amount of term deposits in portfolio 𝑝 . AIs should repeat the above for each loan portfolio and currency to calculate the aggregate position in each time band.
5.2.3 Non-maturity deposits
 AIs have a choice to either slot NMDs into the appropriate time bands according to the earliest date on which their interest rates can be adjusted, or estimate their behavioural maturity using the methodology below.  NMDs should first be segmented into retail and non-retail categories. Retail deposits should be considered as held in a transactional account when regular transactions are carried out in that account (e.g. when salaries are regularly credited) or when the deposit is non-interest bearing. Other

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion retail deposits should be considered as held in a non-transactional account.  AIs should first identify stable NMDs, i.e. those that are found to remain undrawn with a high degree of likelihood, using observed volume changes over the past 10 years. AIs should then identify core deposits, which are stable NMDs that are unlikely to reprice even under significant changes in the interest rate environment. All other NMDs are non-core deposits. AIs are required to estimate the level of core deposits using this two￾step procedure for each NMD category, subject to the caps in the table below. Cap on proportion of core deposits to total NMDs (%) Cap on average maturity of core deposits (years) Retail/transactional 90 5 Retail/non￾transactional 70 4.5 Non-retail 50 4  NMDs should finally be slotted into the appropriate time band. Non-core deposits should be considered as overnight deposits and accordingly should be placed into the overnight time band. Core deposits should be slotted according to their average behavioural maturity, which should be determined by AIs using an appropriate procedure subject to the caps in the
table above.
5.3 Standardised interest rate shock scenarios
5.3.1 The change in the risk-free interest rate ∆𝑟𝑖,𝑐
(𝑘) for interest rate shock scenario 𝑖, currency 𝑐 and time band 𝑘 is calculated according to the equations below (see
table below for values of 𝑅̅):
(i) parallel shock up:
∆𝑟1,𝑐
(𝑘) = 𝑅̅
𝑝𝑎𝑟𝑎𝑙𝑙𝑒𝑙,𝑐
(ii) parallel shock down:
∆𝑟2,𝑐
(𝑘) = −𝑅̅
𝑝𝑎𝑟𝑎𝑙𝑙𝑒𝑙,𝑐

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion (iii) steepener shock:
∆𝑟3,𝑐
(𝑘) =
−0.65 ∙ 𝑅̅
𝑠ℎ𝑜𝑟𝑡,𝑐
∙ 𝑒
−𝑡𝑘
4 + 0.9 ∙ 𝑅̅
𝑙𝑜𝑛𝑔,𝑐
∙ (1 − 𝑒
−𝑡𝑘
4 )
(iv) flattener shock:
∆𝑟4,𝑐
(𝑘) =
0.8 ∙ 𝑅̅
𝑠ℎ𝑜𝑟𝑡,𝑐
∙ 𝑒
−𝑡𝑘
4 − 0.6 ∙ 𝑅̅
𝑙𝑜𝑛𝑔,𝑐
∙ (1 − 𝑒
−𝑡𝑘
4 )
(v) short rates shock up:
∆𝑟5,𝑐
(𝑘) = 𝑅̅
𝑠ℎ𝑜𝑟𝑡,𝑐
∙ 𝑒
−𝑡𝑘
(vi) short rates shock down:
∆𝑟6,𝑐
(𝑘) = −𝑅̅
𝑠ℎ𝑜𝑟𝑡,𝑐
∙ 𝑒
−𝑡𝑘
5.3.2 The final post-shock interest rate, subject to a −2% floor,
is given by
𝑟𝑖,𝑐
(𝑘) = 𝑚𝑎𝑥(𝑟0,𝑐
(𝑘) + ∆𝑟𝑖,𝑐
(𝑘), −2%)
Specified size of interest rate shocks (𝑅̅, in bps) ARS AUD BRL CAD CHF CNY CNH EUR Parallel 400 300 400 200 100 250 250 200 Short 500 450 500 300 150 300 300 250 Long 300 200 300 150 100 150 150 100 GBP HKD IDR INR JPY KRW MXN Parallel 250 200 400 400 100 300 400 Short 300 250 500 500 100 400 500 Long 150 100 350 300 100 200 300 RUB SAR SEK SGD TRY USD ZAR Parallel 400 200 200 150 400 200 400 Short 500 300 300 200 500 300 500 Long 300 150 150 100 300 150 300
5.3.3 The table above will be updated from time to time based

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion on parameter updates provided by the BCBS. AIs should contact the HKMA if they need to report a currency that is not in the table.
56. Oversight by AIs
56.1 Responsibilities of Board and senior management
56.1.1 Effective oversight by an An AI’s Board of Directors and
senior management is are responsible for oversight of the IRRBB management framework and the AI’s risk appetite for IRRBB,critical for sound interest rate risk management practices. which should be articulated in terms of the risk to both economic value and earnings. AIs must implement policy limits that are consistent with their risk appetite. See CG-1 "Corporate Governance of Locally Incorporated Authorized Institutions" and IC-1 “General Risk Management ControlsFramework” for details of their risk management responsibilities. Many of the requirements and practices cited have a general application.
56.2 Asset and Liability Management Committee
56.2.1 The Board of Directors may delegate responsibility for
establishing interest rate riskmonitoring and management of IRRBB policies and strategies to the Asset and Liability Committee (“ALCO”), which is a designated committee usually composed of senior staff. Larger or more complex AIs should have such committees, responsible for the design and administration of interest rate riskIRRBB management. The ALCO should include members with clear lines of authority over the units responsible for establishing and managing positions. The Board should ensure that the AI’s organisational structure enables the ALCO to carry out its responsibilities.
66.2.2 The main role and functions of the ALCO are described
in CG-1 “Corporate Governance of Locally Incorporated Authorized Institutions”.
56.3 Independent risk management
56.3.1 The Board or senior management should assign
responsibility for managing interest rate riskIRRBB to individuals or units with appropriate experience and expertise. The responsible personnel should have an

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion adequate understanding of all types of interest rate riskIRRBB faced throughout the AI.
56.3.2 There should be adequate segregation of duties in key
elements of the risk management process to avoid potential conflicts of interest. For example, the level of interest rate riskIRRBB is determined by how a particular transaction is evaluated based on current market rates. Such evaluation is normally conducted by the risk management or operations department of an AI while the actual transaction is performed by a risk-taking unit or front office. This is to ensure independent risk assessment of the transactions.
67. Risk management policies, procedures and controls
67.1 Coverage
67.1.1 Whatever the methodology chosen, an AI's interest rate
riskIRRBB management procedures should be clearly defined and consistent with the nature and complexity of its activities.
67.1.2 The policies, procedures and limits (e.g. limits to fixed
rate deals, use of interest rate swaps, etc.) should be properly documented, drawn up after careful consideration of interest rate riskIRRBB associated with different types of lending, and reviewed and approved and reviewed (at least annually) by management at the appropriate level. The policies and procedures should delineate delegated powers, lines of responsibility and accountability over IRRBB management decisions and should clearly define authorised instruments, hedging strategies and risk-taking opportunities.
67.1.3 There should also be an accurate, informative and timely
management information system for interest rate riskIRRBB. This is essential both to keep senior management and, where appropriate, individual business line managers in the picture and to facilitate compliance with Board policy.
67.1.4 AIs’ policies and procedures for interest rate riskIRRBB
management should cover the general criteria set out in IC-1 “General Risk Management ControlsFramework” and other criteria specific to interest rate riskIRRBB as discussed in the following subsections.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
67.2 New services and strategies
67.2.1 AIs should identify the interest rate risks inherent in new
services and activities and ensure that these are subject to adequate procedures and controls before being introduced or undertaken. For example, an AI specialising in prime-based mortgage loans that then engages in HIBOR-based mortgage loans with interest rate caps for customers should be aware of the volatility of HIBOR and the embedded option features.
67.2.2 AIs may be exposed to additional interest rate risk if they
develop products or services that enable greater access to customers who primarily seek the best rate. The introduction of e-banking services is an example of such services. This reinforces the need for AIs to react quickly to changing market conditions and to ensure that their pricing strategy has catered for an adequate interest spread to absorb any additional interest rate risk.
67.2.3 AIs should consider balancing cash flows and managing
the interest rate risk arising from new services or strategies through hedging, e.g. using swaps or other derivative instruments. Major hedging or risk management initiatives should be approved in advance by the Board or a committee such as the ALCO.
67.3 Risk measurement, monitoring and control
67.3.1 AIs should have interest rate riskIRRBB measurement
systems that encompass all significant causes of such risk. The systems should evaluate the effect of rate changes on both earnings or and economic value meaningfully and accurately within the context and complexity of their activities. They should be able to flag any excessive exposures.
67.3.2 Measurement systems should:
 evaluate all significant interest rate riskIRRBB arising from the full range of an AI's assets, liabilities and OBS positions, both trading and non-trading. If the same measurement systems and management methods are not used for all activities, an integrated view of interest rate riskIRRBB across products and business lines should be available to management;

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion  employ a variety of generally accepted financial models and ways of measuring risk, rather than relying on a single measure of risk;  have accurate and timely data (in relation to rates, maturities, repricing, embedded options and other details) on current positions 15 . Data inputs should be automated as much as possible to reduce administrative errors;  document the assumptions, parameters and limitations on which they are based. Material changes to assumptions should be documented, justified and approved by senior management. Systems should also be sufficiently flexible to incorporate supervisory-imposed constraints on AIs’ internal risk parameter estimates;  cover all significant sources of interest rate riskIRRBB (e.g. repricing, yield curvegap, basis and option risks). While all of an AI's positions should be appropriately treated, its largest concentrations and positions should be assessed with special thoroughness, as should instruments which might have a material effect on an AI's overall position (notwithstanding that they are not major concentrations) and instruments with significant embedded or explicit options; and  assess exposures in different currencies (subject to para. 67.3.6 below).
67.3.3 Techniques to measure interest rate riskIRRBB exposure
from an earnings and economic value perspective comprise, in increasing degrees of complexity, simple calculations, static simulations using current holdings and highly sophisticated dynamic modelling techniques based on business forecasts and decisions. These are discussed in greater detail in Annex B. As a minimum, AIs should be able to use the simpler techniquesstandardised framework for measuring interest rate riskIRRBB exposure, such as producing a maturity/repricing schedule and carrying out gap analysis (see section B2 of Annex Bsection 5). Where cash flows

15 Any manual adjustments to underlying data should be clearly documented and the nature and reasons for the adjustments should be clearly understood.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion are slotted into different time bands (e.g. for gap analyses), the slotting criteria should be stable over time to allow for a meaningful comparison of risk figures over different periods.
67.3.4 As gap analysis provides only a rough approximation of
changes in net interest income due to its limitations (see para. B2.7 below), AIs having complex risk profiles should employ more sophisticated interest rate riskIRRBB measurement techniques such as the simulation-based approaches (see section B3 of Annex B and Annex C). The assumptions underlying a simulation model can sometimes make it difficult to determine how much a variable contributes to changes in the simulation results. It is therefore necessary to supplement the simulation model by additional in-depth analysis or other simulation models to isolate the risk of each variable inherent in the existing balance sheet.
67.3.5 When assessing its IRRBB exposures, an AI should
make judgments and assumptions about how an instrument’s actual maturity or repricing behaviour may vary from the instrument’s contractual terms because of behavioural optionalities.Regarding positions where the behavioural maturities may differ from contractual maturities, these should be given assumed maturities or repricing frequencies based on past experience of the AI and with sound empirical analysis. Such positions include demand deposits which can be withdrawn without notice, but a portion of which tend to remain with the AI in practice (i.e. core deposits). Conversely, term deposits have contractual maturities but depositors generally have the option to make withdrawals at any time, subject to applicable penalties or charges. On the asset side, prepayment features of mortgages and mortgage-related instruments also introduce uncertainty about the timing of cash flows from these positions. The behavioural assumptions used should be conceptually sound and reasonable, and consistent with historical experience (see Annex B for a list of possible considerations). Such assumptions should be rigorously tested and aligned with the AI’s business strategies. The most significant assumptions should be documented, clearly understood by the Board or the relevant committee andshould be subject to periodic review (at

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion least annually). The issues are discussed in more detail in section B4 of Annex B.
67.3.6 AIs with positions in different currencies need to
measure their exposure to interest rate riskIRRBB in each currency. They may do so for each currency separately, on the ground that yield curves for different currencies vary. AIs with material multi-currency exposures may, if they have the requisite skills and sophistication, decide to aggregate their exposures in certain currencies where there is assumed to be some correlation between interest rates for those currencies. Such AIs should review periodically whether these assumptions remain valid and assess their potential exposure if such correlations prove invalid.
7.3.7 Measurement outcomes of IRRBB and hedging
strategies should be reported to the Board or the relevant committee on a regular basis (at least semiannually), at relevant levels of aggregation (by consolidation level and currency). The reports should include at least the following:
 summaries of the AI’s aggregate IRRBB exposures, and explanatory text that highlights the assets, liabilities, cash flows, and strategies that are driving the level and direction of IRRBB;  reports demonstrating the AI’s compliance with policies and limits;  key assumptions such as NMD characteristics and prepayments on fixed rate loans;  results of stress tests, including assessment of sensitivity to key assumptions and parameters, as well as sensitivity to changes in market conditions, with particular reference to portfolios that may be subject to significant mark-to-market movements; and  summaries of the reviews of IRRBB policies, procedures and adequacy of the measurement systems, including any findings of internal and external auditors and/or other equivalent external parties (such as consultants).
67.4 Stress-testing

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IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
67.4.1 AIs should measure their vulnerability to loss in stressed
market conditions, including the breakdown of key assumptions, and consider those results when establishing and reviewing their policies and limits for interest rate riskIRRBB, as well as in the CAAP.
67.4.2 An AI’s stress testing framework for IRRBB should be
commensurate with its nature, size and complexity as well as business activities and overall risk profile. The framework should have clearly defined objectives, well￾documented assumptions and sound methodologies, and should take into account the opinions of experts within the AI.
7.4.3 AIs’ IRRBB management systems should be able to
calculate, by currency, the impact on economic value and earnings of multiple scenarios, including the six standardised interest rate shock scenarios 16 set out in subsection 5.3, as well as internally selected interest rate shock scenarios addressing the AI’s risk profile according to its CAAP. Possible stress scenarios include:
 historical scenarios such as the Asian Financial Crisis in the late nineties;  changes in the general level of interest rates, e.g. changes in yields of 200 basis points or more in one year 17;  changes in the relationships between key market rates (i.e. basis risk), e.g. (i) a surge in term and savings deposit rates and HIBOR but no change in the prime rate, and (ii) a drop in the prime rate but no change in term and savings deposit rates and HIBOR 18;  changes in interest rates in individual time bands to different relative levels (i.e. yield curvenon￾parallel gap risk);  changes in the liquidity of key financial markets or changes in the volatility of market rates; and

16 AIs are only required to calculate the impact of two standardised interest shock scenarios (parallel up and parallel down) on earnings (see para. 4.4.3). 17 This scenario is incorporated as the standardised 200-basis-point parallel rate shock in the Interest Rate Risk Return. 18 These scenarios for basis risk are incorporated in the Interest Rate RiskIRR Return.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion  changes in key business assumptions and parameters such as the correlation between Hong Kong dollar and US dollar interest rates. In particular, changes in assumptions used for illiquid instruments and instruments with uncertain contractual maturities help understanding of an AI’s risk profile.
7.4.4 When developing interest rate shock scenarios, AIs
should consider the following:
 the scenarios should be severe and plausible, and sufficiently wide-ranging to identify parallel and non-parallel gap risk, basis risk and option risk;  special consideration should be given to instruments or markets where concentrations exist;  AIs should assess the possible interaction of IRRBB with other risks, e.g. credit risk and liquidity risk;  AIs should assess the effect of adverse changes in the spreads of new assets/liabilities replacing those assets/liabilities maturing over the horizon of the forecast on their NII;  AIs with significant option risk should include scenarios that capture the exercise of such options. For example, AIs that have products with sold caps or floors should include scenarios that assess how the risk positions would change should those caps or floors move into the money. AI should also develop interest rate assumptions to measure their IRRBB exposures given changes in interest rate volatilities;  AIs should specify the term structure of interest rates that will be incorporated and the basis relationship between yield curves when building interest rate shock scenarios;  AIs should estimate how interest rates that are administered or managed by management might change;  AIs should consider the time it would need to reduce or unwind unfavourable IRRBB exposures,

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion and its capability or willingness to withstand accounting losses in order to reposition its risk profile;  Forward-looking scenarios should incorporate changes in portfolio composition, new products, new market information and emerging risks; and  AIs should perform qualitative and quantitative reverse stress tests to identify key vulnerabilities.
67.5 Limits
67.5.1 AIs should establish and enforce operating limits and
other practices that maintain exposures within levels consistent with their internal policies and that accord with their approach to measuring interest rate riskIRRBB. Such limits should be approved by the Board or a committee such as the ALCO.
67.5.2 In particular, AIs should set a limit on the extent to which
floating rate exposures are funded by fixed rate sources and vice versa to limit interest rate riskIRRBB. In floating rate lending, AIs should limit the extent to which they run any basis risk that may arise if lending and funding are not based on precisely the same market interest rate (e.g. HIBOR).
67.5.3 The limits should be consistent with AIs’ underlying
approach to interest rate riskIRRBB measurement and should be directed at how reported earnings and capital adequacy might be affected by changes in market interest rates. As regards earnings, AIs should consider limits on earnings volatility in both net income and net interest income under specified interest rate scenarios so as to quantify what portion of their interest rate riskIRRBB exposure arises from non-interest income.
67.5.4 The limits should be appropriate to the nature, size,
complexity and capital adequacy of the AI, as well as its ability to measure and manage its risks. Depending on the nature of an AI's activities and business model, sub￾limits may also be identified for individual business units, portfolios, instrument types or specific instruments. AIs with significant exposures to gap risk, basis risk or positions with explicit or embedded options should establish risk tolerances appropriate for these risks.Limits on the effect of rates on an AI's earnings and

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion economic value should reflect the size and complexity of its positions. Simple limits such as gap limits may be adequate for AIs undertaking mainly traditional banking activities and with few holdings of long-term instruments, options, instruments with embedded options or other instruments whose value may be substantially altered by changes in market rates. More complex AIs may need to use more sophisticated limits such as factor sensitivity limits. Examples of the various types of limits are given in sections B5 and B6 of Annex B.
67.5.5 Limits on interest rate riskIRRBB should be related to
explicit scenarios of changes in market interest rates and/or term structures, e.g. movements up or down of specified ranges or a change in shape. These ranges scenarios or changes should constitute genuine stress conditions and should be developed in the light of historic rate volatility and time needed to unwind, restructure or hedge an AI’s interest rate riskIRRBB position. They can also reflect measures from the underlying statistical distribution of interest rates, e.g. earnings at risk or economic value at risk techniques. The scenarios should cover all possible sources of interest rate riskIRRBB, e.g. mismatch, yield curvegap, basis and option risks, and not just parallel shifts in interest rates or other simple scenarios.
7.5.6 There should be systems in place to ensure that
positions that exceed, or are likely to exceed, limits established by the AI should receive prompt management attention and be escalated without delay. There should be a clear policy on who will be informed, how the communication will take place and the actions which will be taken in response to an exception.
67.6 Internal controls and independent audits
67.6.1 As an integral part of the overall internal control system,
AIs should have adequate internal controls over interest rate riskIRRBB. The effectiveness of such controls should be evaluated regularly by independent parties, e.g. internal or external auditors.
67.6.2 AIs should conduct periodic reviews of their risk
management process for interest rate riskIRRBB to ensure its integrity, accuracy and reasonableness. AIs with more complex profiles and measurement systems

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion should have their internal models or calculations audited or validated by an independent internal or external reviewer. Reports written by independent reviewers should be made available to the HKMA.
67.6.3 In such independent reviews, the factors to be
considered include the quality of interest rate riskIRRBB management and the size of interest rate riskIRRBB, e.g.:
 the volume and price sensitivity of various products;  how vulnerable earnings and capital economic value are to all forms of IRRBB, e.g. gap, basis and option risksdiffering rate changes including yield curve changes; and  the exposure of earnings and economic value to various other forms of interest rate risk, including basis and option risks.compliance with established policies and procedures and escalation procedures for any exceeded limits; and  any significant changes that may affect the effectiveness of controls (including changes in market conditions, personnel, technology and structures of compliance with exposure limits).

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
Annex A : Basel principles for the management of interest
rate riskIRRBB
A1 Background
A1.1 The Basel Committee issued the paper “Principles for the management and supervision of interest rate risk” (“IRRBB Principles”) in July 2004, setting out supervisory expectations for banks' identification, measurement, monitoring and control of IRRBB as well as its supervision. In April 2016, the Committee published standards for “Interest rate risk in the banking book” with revised IRRBB Principles for banks as summarised below.The Basel Committee issued the paper “Principles for the Management of Interest Rate Risk” (“the paper”) in September 1997. The paper sets out 11 principles covering, inter alia, the role of the Board and senior management, policies and procedures, measurement and monitoring systems, internal controls and information for supervisory authorities. These are summarised below. A2 Board and senior management oversightPrinciples for banks A2.1 IRRBB is an important risk for all banks that must be specifically identified, measured, monitored and controlled. In addition, banks should monitor and assess credit spread risk in the banking book.In order to carry out its responsibilities, the Board of Directors of a bank should approve strategies and policies with respect to interest rate risk management and ensure that senior management takes the steps necessary to monitor and control these risks. The Board of Directors should be informed regularly of the interest rate risk exposure of the bank in order to assess the monitoring and controlling of such risk. A2.2 The governing body of each bank is responsible for oversight of the IRRBB management framework, and the bank’s risk appetite for IRRBB. Monitoring and management of IRRBB may be delegated by the governing body to senior management, expert individuals or an asset and liability management committee (henceforth, its delegates). Banks must have an adequate IRRBB management framework, involving regular independent reviews and evaluations of the

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion effectiveness of the system.Senior management should ensure that the structure of the bank's business and the level of interest rate risk it assumes are effectively managed, that appropriate policies and procedures are established to control and limit these risks and that resources are available for evaluating and controlling interest rate risk. A2.3 The banks’ risk appetite for IRRBB should be articulated in terms of the risk to both economic value and earnings. Banks must implement policy limits that target maintaining IRRBB exposures consistent with their risk appetite. A2.4 Measurement of IRRBB should be based on outcomes of both economic value and earnings-based measures, arising from a wide and appropriate range of interest rate shock and stress scenarios. A2.5 In measuring IRRBB, key behavioural assumptions should be fully understood, conceptually sound and documented. Such assumptions should be rigorously tested and aligned with the bank’s business strategies. A2.6 Measurement systems and models used for IRRBB should be based on accurate data, and subject to appropriate documentation, testing and controls to give assurance on the accuracy of calculations. Models used to measure IRRBB should be comprehensive and covered by governance processes for model risk management, including a validation function that is independent of the development process. A2.7 Measurement outcomes of IRRBB and hedging strategies should be reported to the governing body or its delegates on a regular basis, at relevant levels of aggregation (by consolidation level and currency). A2.8 Information on the level of IRRBB exposure and practices for measuring and controlling IRRBB must be disclosed to the public on a regular basis. A2.9 Capital adequacy for IRRBB must be specifically considered as part of the Internal Capital Adequacy Assessment Process (ICAAP) approved by the governing body, in line with the bank’s risk appetite on IRRBB.Banks should clearly define the individuals or committees responsible for managing interest rate risk

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion and should ensure that there is adequate segregation of duties in key elements of the risk management process to avoid potential conflicts of interest. Banks should have risk measurement, monitoring and control functions with clearly defined duties that are sufficiently independent from position-taking functions of the bank and which report risk exposures directly to senior management and the Board of Directors. Larger or more complex banks should have a designated independent unit responsible for the design and administration of the bank's interest rate risk measurement, monitoring and control functions. A4 Risk measurement, monitoring and control functions A4.1 It is essential that banks have interest rate risk measurement systems that capture all material sources of interest rate risk and that assess the effect of interest rate changes in ways that are consistent with the scope of their activities. The assumptions underlying the system should be clearly understood by risk managers and bank management. A4.2 Banks should establish and enforce operating limits and other practices that maintain exposures within levels consistent with their internal policies. A4.3 Banks should measure their vulnerability to loss under stressed market conditions, including the breakdown of key assumptions, and consider those results when establishing and reviewing their policies and limits for interest rate risk. A4.4 Banks should have adequate information systems for measuring, monitoring, controlling and reporting interest rate exposures. Reports should be provided on a timely basis to the bank's Board of Directors, senior management and, where appropriate, individual business line managers. A5 Internal controls A5.1 Banks should have an adequate system of internal controls over their interest rate risk management process. A fundamental component of the internal control system involves regular independent reviews and evaluations of the effectiveness of the system and, where necessary, ensuring that appropriate revisions or

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion enhancements to internal controls are made. The results of such reviews should be available to the relevant supervisory authorities. A6 Information for supervisory authorities A6.1 Banks should provide sufficient and timely information to their supervisory authorities to enable them to evaluate their level of interest rate risk. This information should take appropriate account of the range of maturities and currencies in each bank's portfolio, including OBS items, as well as other relevant factors, such as the distinction between trading and non-trading activities.

Supervisory Policy Manual
IR-1 Interest Rate Risk Managementin the Banking Book V.1 2 – 13.12.02Consulta tion
Annex B : Factors influencing behavioural optionality
Fixed rate loans subject to prepayment risk
Loan size, loan-to-value (LTV) ratio, borrower characteristics, contractual interest rates, seasoning, geographical location, original and remaining maturity, and other historical factors. Other macroeconomic variables such as stock indices, unemployment rates, GDP, inflation and housing price indices. Fixed rate loan commitments Borrower characteristics, geographical location (including competitive environment and local premium conventions), customers’ relationship with the AI as evidenced by cross￾products, remaining maturity of the commitment, seasoning and remaining term of the mortgage. Term deposits subject to early redemption risk Deposit size, depositor characteristics, funding channel (e.g. direct or brokered deposit), contractual interest rates, seasonal factors, geographical location and competitive environment, remaining maturity and other historical factors. Other macroeconomic variables such as stock indices, unemployment rates, GDP, inflation and housing price indices. NMDs Responsiveness of product rates to changes in market interest rates, current level of interest rates, spread between an AI’s offer rate and market rate, competition from other firms, the AI’s geographical location and demographic and other relevant characteristics of its customer base.
Annex B : Interest rate risk measurement techniques
[whole section deleted]
Annex C : A simulation model of net interest income
[whole section deleted]
—————————
Contents Glossary Home Introduction

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Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)):____________________ Page ___ of ___

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING ASSETS (Note (3))
  TIME BAND

1. Total interest bearing assets 2. Fixed rate assets 3. Floating rate assets 4. Managed rate assets
   a.
   Total b.
   Residential mortgage loans c.
   Total weighted average yield d.
   Weighted average yield
   (Residential mortgage loans) a.
   Total b.
   Residential mortgage loans c.
   Residential mortgage loans subject to prepayment risk d.
   Other assets subject to prepayment risk a.
   Total b.
   Residential mortgage loans a.
   Total b.
   Residential mortgage loans
   2a+3a+4a 2b+3b+4b
   Next day or less (A) % %
   2 to 7 days (B) % %
   8 days to 1 month (C) % %
   1 to 3 months (D) % %
   3 to 6 months (E) % %
   6 to 9 months (F) % %
   9 to 12 months (G) % %
   1 to 1.5 years (H) % %
   1.5 to 2 years (I) % %
   2 to 3 years (J) % %
   3 to 4 years (K) % %
   4 to 5 years (L) % %
   5 to 6 years (M) % %
   6 to 7 years (N) % %
   7 to 8 years (O) % %
   8 to 9 years (P) % %
   9 to 10 years (Q) % %
   10 to 15 years (R) % %
   15 to 20 years (S) % %
   More than 20 years (T) % %
   Total book value Total (A to T)
   Non-interest bearing assets (U)
   Total assets Total (A to U)
   Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): __________________ Page ___ of ___

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING LIABILITIES (Note (3))
  TIME BAND

5. Total interest bearing liabilities 6. Fixed rate liabilities 7. Floating rate liabilities 8. Managed rate liabilities
   a.
   Total b.
   Deposits c.
   Total weighted average interest costs d.
   Weighted average interest costs
   (Deposits) a.
   Total b.
   Deposits c.
   Deposits subject to early redemption risk d.
   Other liabilities subject to early redemption risk a.
   Total b.
   Deposits a.
   Total b.
   Deposits
   6a+7a+8a 6b+7b+8b
   Next day or less (A) % %
   2 to 7 days (B) % %
   8 days to 1 month (C) % %
   1 to 3 months (D) % %
   3 to 6 months (E) % %
   6 to 9 months (F) % %
   9 to 12 months (G) % %
   1 to 1.5 years (H) % %
   1.5 to 2 years (I) % %
   2 to 3 years (J) % %
   3 to 4 years (K) % %
   4 to 5 years (L) % %
   5 to 6 years (M) % %
   6 to 7 years (N) % %
   7 to 8 years (O) % %
   8 to 9 years (P) % %
   9 to 10 years (Q) % %
   10 to 15 years (R) % %
   15 to 20 years (S) % %
   More than 20 years (T) % %
   Total book value Total (A to T)
   Non-interest bearing liabilities (U)+(V)
   Equity capital (U)
   Others (V)
   Total liabilities Total (A to V)
   Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): __________________ Page ___ of ___

• Delete where inappropriate. (In HK$ Million or equivalent)
  OFF-BALANCE SHEET POSITIONS (Note (3))
  TIME BAND

9. Total 10. Forward foreign
   exchange contracts
10. Interest rate
    swaps
11. Cross currency
    swaps
12. Futures / FRAs 14. Options 15. Others
    a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short
    10a+11a+12a+ 10b+11b+12b+
    13a+14a+15a 13b+14b+15b
    Next day or less (A)
    2 to 7 days (B)
    8 days to 1 month (C)
    1 to 3 months (D)
    3 to 6 months (E)
    6 to 9 months (F)
    9 to 12 months (G)
    1 to 1.5 years (H)
    1.5 to 2 years (I)
    2 to 3 years (J)
    3 to 4 years (K)
    4 to 5 years (L)
    5 to 6 years (M)
    6 to 7 years (N)
    7 to 8 years (O)
    8 to 9 years (P)
    9 to 10 years (Q)
    10 to 15 years (R)
    15 to 20 years (S)
    More than 20 years (T)
    Total off-balance sheet positions Total (A to T) Notes:
    (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): __________________ Page ___ of ___

• Delete where inappropriate. (In HK$ Million or equivalent)
  IMPACT / SCENARIO ANALYSIS
  TIME BAND
  16.
  Net positions
  17.
  Earnings perspective
  18.
  Economic value perspective
  19.
  Basis risk a.
  Excluding coupon cash flows b.
  Including coupon cash flows a.
  Time band mid￾point
  (years) b.
  Impact on earnings over the next 12 months
  (parallel up) c.
  Impact on earnings over the next
  12 months
  (parallel down) a.
  Current
  EVE b.
  Impact on
  EVE
  (parallel up) c.
  Impact on
  EVE
  (parallel down) d.
  Impact on
  EVE
  (steepener) e.
  Impact on
  EVE
  (flattener) f.
  Impact on
  EVE
  (short rates up) g.
  Impact on
  EVE
  (short rates down)
  Period for which changes in interest rates last Scenario (i) All rates except for fixed and managed rates on interest bearing assets rise by 200 bps Scenario (ii) Managed rates on interest bearing assets drop by 200 bps while other rates remain unchanged 1a-5a +9a-9b Next day or less (A) 0.0028 1 month 2 to 7 days (B) 0.0125 3 months 8 days to 1 month (C) 0.0528 6 months 1 to 3 months (D) 0.1667 12 months 3 to 6 months (E) 0.375 6 to 9 months (F) 0.625 9 to 12 months (G) 0.875 1 to 1.5 years (H) 1.25
  1.5 to 2 years (I) 1.75
  2 to 3 years (J) 2.5
  3 to 4 years (K) 3.5
  4 to 5 years (L) 4.5
  5 to 6 years (M) 5.5
  6 to 7 years (N) 6.5
  7 to 8 years (O) 7.5
  8 to 9 years (P) 8.5
  9 to 10 years (Q) 9.5
  10 to 15 years (R) 12.5
  15 to 20 years (S) 17.5
  More than 20 years (T) 25
  Options (U)
  Total (A to U)
  Tier 1 capital at reporting date (Note (3)) (V) Impact on EVE as % of Tier 1 capital (A to U) / (V) % % % % % % Notes:
  (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report the Tier 1 capital for all currencies. Overseas incorporated institutions should refer to the Tier 1 capital of their head office.

MA(BS)12 /P. 1 (06/2017)
Completion Instructions
Return of Interest Rate Risk Exposures (Form MA(BS)12) Introduction

1. This return collects information on the interest rate risk exposures of authorized institutions
   and will be used to help assess the potential impact of movements in interest rates on institutions’ earnings and economic value.
2. The Completion Instructions contain three sections. Section A describes the general
   reporting requirements. Section B provides definitions and clarification of certain items.
   Section C explains the specific reporting requirements for each item in the return form,
   with an illustration at Annex 1.
   Section A : General Instructions
3. All authorized institutions are required to complete this return showing their positions
   as at the last calendar day of each quarter and submit the return to the HKMA not later than one monthsix weeks after the end of each quarter. If the submission deadline falls on a public holiday, it will be deferred to the next working day. Locally incorporated institutions should complete the return both on a solo basis, reporting the combined positions of their local and overseas offices (if any), and on a consolidated basis (where applicable), following the scope of consolidation used for the purpose of Capital Adequacy Ratio (CAR) requirements as defined in the Banking (Capital) Rules. Overseas incorporated institutions are required to report the positions of their Hong Kong operations only.
4. This return captures both on- and off-balance sheet positions. Locally incorporated
   institutions subject to the market risk capital adequacy regime 1 (“non-exempted institutions”) are required to report positions of the banking book only. Other institutions, i.e. those locally incorporated and exempted from the market risk capital adequacy regime (“exempted institutions”) and those incorporated overseas, should report aggregate positions of the banking book and trading book.
5. The interest rate risk positions for each selected currency should be reported separately
   using the same four-page return form. Transactions denominated in gold or composite currencies such as the SDR should be reported as separate currencies. Onshore Renminbi (CNY) and offshore Renminbi (CNH) should be treated as separate currencies. 2 Positions in the Euro and the national currencies, if any, of the Euro-participating countries are to be

1 The details of the market risk capital adequacy regime, including the de minimis exemption criteria and other requirements relevant to exempted institutions, are set out in the statutory guideline “Maintenance of Adequate Capital Against Market Risk” (CA-G-2) in the Supervisory Policy Manual.Banking (Capital) Rules. Institutions should treat its assets or liabilities as denominated in CNH if the associated interest rates are priced (either directly or indirectly) based on offshore reference rates (such as CNH HIBOR), and vice versa.

MA(BS)12 /P. 2 (06/2017) treated as positions in the Euro. Institutions should report all these positions in aggregate on one return form. As a basic requirement, institutions should complete at least two return forms, showing their interest rate risk exposures arising from assets and liabilities denominated in Hong Kong dollars and in US dollars respectively (nil returns are required for these two currencies). Institutions which have significant positions in other currencies should report such positions on separate return forms (see paragraph 8 below). The total positions in non-reported currencies could not exceed 10% of an institution’s total on￾balance assets in all currencies.3 The submitted forms should be sequentially numbered.
6. All the positions captured by this return should be slotted into the appropriate time bands
according to the earliest interest repricing date (see paragraph 11 below). Each time band includes its upper limit but not its lower limit, e.g. the ‘3 to 4 years’ time band can be expressed as 3𝑦 < 𝑡 ≤ 4𝑦. Institutions that meet the criteria set out in Annex 2 may, subject to the HKMA’s approval, slot their positions into different time bands based on their estimation of the respective behavioural maturity. Institutions are allowed to phase in the use of behavioural maturity on a product-by-product basisFor retail fixed rate loans subject to prepayment risk and retail term deposits subject to early redemption risk, institutions should follow the steps in Section 5.2 of the Supervisory Policy Manual (SPM) IR-1 "Interest Rate Risk in the Banking Book" to determine the repricing maturities.
7. Unless otherwise stated, book value should be used for reporting purposes. Amounts are to
be shown to the nearest million, in Hong Kong dollars or Hong Kong dollar equivalent in the case of foreign currencies. The middle market T/T rates ruling as at the close of business on the reporting date should be adopted for conversion of foreign currencies to Hong Kong dollars.
Section B : Definitions and Clarification
8. An institution would be regarded as having a significant position in a currency if the sum of
its on-balance sheet assets or liabilities, whichever is the larger, in that currency and its off-balance sheet positions (see paragraph 9 below) in the same currency is more than 5% of its total on-balance sheet assets in all currencies (i.e. total amount of “Total assets” reported under item 23 of the Return of Assets and Liabilities (Form MA(BS)1) or item 22 of the Combined Return of Assets and Liabilities (Form MA(BS)1B), as the case may be).
9. The off-balance sheet positions are defined as the sum of the notional principal of each off￾balance sheet contract that is to be included under items 10 to 15 of this return. For the
avoidance of doubt, a foreign exchange contract which involves the simultaneous buying and selling of two currencies should be regarded as one contract under each of the currencies concerned while a single currency interest rate swap which involves both the receipt and payment of interest in the same currency is counted once in the relevant currency.

If an institution’s total positions in non-reported currencies exceeded 10% of its total assets, the institution should report these positions, starting from the largest, until the remaining positions in non-reported currencies fall below 10% of its total assets.

MA(BS)12 /P. 3 (06/2017)
10. All on-balance sheet interest bearing assets 4
and liabilities are to be classified into fixed rate items, variablefloating rate items and managed rate items. Fixed rate items are those assets and liabilities with interest rates fixed up to their final maturities. VariableFloating rate items are those which will automatically be repriced at the next repricing date during the life of the items in accordance with movements in the relevant "reference rates" (such as HIBOR) and include those items for which the interest rates can be varied at the discretion of the counterparty (see also the definition of managed rate that follows). Managed rate items are those variable rate items for which there are no fixed repricing dates and the interest rates can be adjusted at any time at the discretion of the reporting institution. These would include, for example, savings non-maturity deposits and mortgage loans.
11. In respect of different interest bearing assets and liabilities, the earliest interest repricing
date means:
(a) for fixed rate items, the maturity dates of the assets or liabilities concerned; in the case of retail fixed rate loans subject to prepayment risk 5 and retail term deposits subject to early redemption risk 6 , institutions should follow the methodology in
Section 5.2 of the SPM;
(b) for variablefloating rate items, the next repricing date of the assets and liabilities concerned; in the case of those items for which the interest rates can be varied at the discretion of the counterparty, the earliest date, based on past experience, on which the interest rates would could be repriced assuming that the reference rates on which the interest rates are based are adjusted on the business day immediately following the reporting date; and (c) for managed rate items, the earliest date on which it would be possible for the interest rates of the assets and liabilities concerned to be adjusted assuming that the reference rates (e.g. prime or standard savings rate) on which the interest rates are based are adjusted on the business day immediately following the reporting date. For non-maturity deposits 7 , institutions also have the option to slot them into different time bands based on the methodology in Section 5.2 of the SPM.
12. For the purpose of this return, interest bearing assets and liabilities include those which do
not involve any formal payment of interest but the values of which are sensitive to interest rate movements. Typically, these include financial instruments which are sold at a discount such as Exchange Fund Bills and zero coupon bonds. They should be reported as fixed rate items according to residual maturity.
13. In respect of on-balance sheet interest bearing assets, institutions should report under
items 1b to 4b a breakdown of the amount of residential mortgage loans pertaining to those items. Residential mortgage loans are loans to professional and private individuals

Interest-bearing assets exclude assets that are deducted from Common Equity Tier 1 (CET1) capital, fixed assets such as real estate or intangible assets, and equity exposures. 5 These are fixed rate loan products where the economic cost of prepayments cannot be charged, or charged only for prepayments above a certain threshold, to the borrower. 6 These are term deposits that can be withdrawn early at the discretion of the customer. 7 These are deposits without a set maturity date that can be withdrawn at any time without advance notice. Non￾interest-bearing deposits (e.g. deposits in current accounts) are also included in non-maturity deposits.

MA(BS)12 /P. 4 (06/2017) for the purchase of residential properties, as defined under item H5b of the Quarterly Analysis of Loans and Advances and Provisions (Form MA(BS)2A). In respect of on￾balance sheet interest bearing liabilities, institutions should report under items 5b to 8b a breakdown of the amount of deposits pertaining to those items. Deposits are deposit liabilities due to non-bank customers, as defined under item 6 of Form MA(BS)1.
14. In respect of assets or liabilities with embedded options 8
, institutions should decompose them into embedded options and underlying assets or liabilities. The embedded options should be reported under off-balance sheet positions (see paragraphs 37-38 below) and the underlying assets or liabilities should be slotted into the appropriate time bands according to their earliest interest repricing date (see paragraph 11 above). In the case of assets or liabilities with an early redemption option (by either the reporting institution or its counterparty), and the institutions concerned cannot decompose them into the embedded option and underlying assets or liabilities, the reporting may be based on the institution’s expectation of whether an early redemption will occur. Such assets or liabilities should then be slotted into the appropriate time bands according to their earliest interest rate repricing date or the redemption date, whichever is the earlier.
15. Assets and liabilities which are repayable by instalments rather than by one lump sum at
maturity should be broken down into individual tranches and slotted into the appropriate time bands according to the repricing date of each tranche. For example, a fixed rate loan of HK$100 million repayable by two semi-annual instalments of HK$50 million each should be regarded as two separate loans, one repayable in six months and the other one year, and slotted into the appropriate time bands according to their residual maturities. In the case of a variable rate loan of HK$100 million repayable by two semi-annual instalments of HK$50 million each, it should also be regarded as two separate loans and be slotted into the appropriate time bands according to the next repricing date of each tranche.
16. In the case of a managed rate mortgage loan, the entire amount of such loan, less the amount
of principal repayable before the earliest repricing date (see paragraph 11(c) above), should be reported in the appropriate time bands into which the repricing date falls. The principal amount repayable between the reporting date and the earliest repricing date should be slotted into the appropriate time bands according to the payment dates contracted for. For example, if a mortgage loan of HK$5 million can be repriced in two months' time, the principal amount repayable between eight days and one month (say HK$0.02 million) should be reported in row (C) of item 4 and the balance of the loan (i.e. HK$4.98 million) should be reported in row (D) of the same item.
17. Institutions which have the practice of raising internal deals to record positions passed from
one unit to another (e.g. Money Market Department to Foreign Exchange Department) within the same institution should not report these internal deals. However, this rule does not apply to an institution incorporated overseas, if the deals in question were executed between the institution's Hong Kong office and its overseas head office or branches.For the purpose of this return, internal deals are transactions between units within the relevant

8 These are explicitly embedded within the contractual terms of an otherwise standard financial instrument where the holder will almost certainly exercise the option if it is in their financial interest to do so. An example of a product with embedded options is a floating rate mortgage loan with embedded caps and/or floors. Prepayment options on non-retail loans (see paragraph 19) and early redemption options on non-retail deposits or bonds (see paragraph 25) should also be treated as embedded options.

MA(BS)12 /P. 5 (06/2017) reporting scope (see paragraph 3 above) of the institution. Internal deals within the banking book should not be reported. For internal deals between the banking book and the trading book, the banking book leg of the internal deal should be reported if and only if the trading book leg of the deal is recognised under the market risk capital framework in the Banking (Capital) Rules.
Section C : Specific Instructions
18. Item 1 rows (A) to (OT) – Total interest bearing assets
Report the sum of items 2a, 3a and 4a under item 1a of the same row. Regarding residential mortgage loans, report the sum of items 2b, 3b and 4b under item 1b of the same row. Report the sum of items 1a and 1b for all time bands in Total (A to OT) under the respective items. Report the weighted average yield of total interest bearing assets and residential mortgage loans under items 1c and 1d respectively of the same row. All the rates reported should be rounded to 2 decimal places. An example showing the method of calculation is given at Annex 3. Interest rates applicable at the reporting date should be used for the purpose of calculation.
19. Item 2 - Fixed rate assets
These assets, such as fixed rate CDs or fixed rate term loans,Fixed rate assets with no prepayment risk should be slotted into the appropriate time bands according to their residual maturities. Retail fixed rate loans subject to prepayment risk, as defined in Section 5.2 of the SPM, should be slotted into the appropriate time bands according to the methodology in
Section 5.2 of the SPM. Where a non-retail loan is subject to prepayment risk, this should be
treated as an asset with embedded options according to paragraph 14.
20. Item 3 - VariableFloating rate assets
These should be slotted into the appropriate time bands according to the next interest rate fixing date. Such assets include, for example, floating rate CDs/notes, and other loans which are automatically priced in accordance with movements in the relevant reference rates. During the period between the final repricing date and final maturity, these assets should continue to be reported as variablefloating rate assets and slotted into the appropriate time bands according to their residual maturities.
21. Item 4 - Managed rate assets
These assets are those for which the interest rate does not change automatically in line with the movement in the reference rate but may be varied at the discretion of the reporting institution. Mortgage loans priced on prime are examples of managed rate assets. These assets should be slotted into the appropriate time bands according to the earliest date on

9 After decomposition, the underlying asset should be reported as a standard fixed rate loan not subject to prepayment risk.

MA(BS)12 /P. 6 (06/2017) which their interest rates can be adjusted assuming that the reference rate (e.g. prime) is adjusted on the business day immediately following the reporting date.
22. Item 1 row (PU) – Non-interest bearing assets
These include, for example, properties, shares, fixed assets and other receivables which are non-interest bearing. Non-accruing assets on which interest is being placed in suspense or interest accrual has ceased should also be included. Properties and fixed assets should be reported net of depreciation.
23. Item 1 Total (A to PU) – Total assets
Report the sum of total interest bearing and non-interest bearing assets. The amount reported may not necessarily be the same as the amount of “Total liabilities” reported under item 5 Total (A to QV). Locally incorporated and exempted institutions without overseas branches and overseas incorporated institutions should note that the amounts reported under this item, in respect of the positions for Hong Kong dollars and US dollars, should be consistent with the amount of “Total assets” reported under the relevant columns of item 23 of Form MA(BS)1.
24. Item 5 rows (A) to (OT) – Total interest bearing liabilities
Report the sum of items 6a, 7a and 8a under item 5a of the same row. Regarding deposits, report the sum of items 6b, 7b and 8b under item 5b of the same row. Report the sum of items 5a and 5b for all time bands in Total (A to OT) under the respective items. Report the weighted average costs of total interest bearing liabilities and deposits under items 5c and 5d respectively of the same row. All the rates reported should be rounded to 2 decimal places. An example showing the method of calculation is given at Annex
3. Interest rates applicable at the reporting date should be used for the purpose of
calculation.
25. Item 6 - Fixed rate liabilities
These liabilities, such as fixed rate CDs, money market deposits and term deposits are to be slotted into the appropriate time bands according to their residual maturities provided they are not subject to early redemption risk. Retail term deposits subject to early redemption risk, as defined in Section 5.2 of the SPM, should be slotted into the appropriate time bands according to the methodology in Section 5.2 of the SPM. Where a non-retail deposit or bond is subject to early redemption risk, this should be treated as a liability with embedded options according to paragraph 14.
26. Item 7 - VariableFloating rate liabilities
These liabilities should be slotted into the appropriate time bands according to the next interest rate fixing date. They include, for example, floating rate debt instruments issued by

10 After decomposition, the underlying liability should be reported as a standard term deposit not subject to early redemption risk.

MA(BS)12 /P. 7 (06/2017) the reporting institution where the interest rate is adjusted automatically on the repricing date in accordance with movements in the relevant reference rates. As with variablefloating rate assets, these liabilities should continue to be classified as variablefloating rate liabilities according to their residual maturities during the period between the final repricing date and the maturity date.
27. Item 8 - Managed rate liabilities
Such liabilities include, for example, deposits for which interest rates can be adjusted at the discretion of the deposit-taking institution. They should be slotted into the appropriate time bands according to the earliest date on which their interest rates can be adjusted assuming that the reference rates (e.g. standard savings rates) are adjusted on the business day immediately following the reporting date. For non-maturity deposits, institutions also have the option to slot them into different time bands based on the methodology in Section 5.2 of the SPM.
28. Item 5 (PU)+(QV) – Non-interest bearing liabilities
Report the sum of equity capital and others.
29. Item 5 row (PU) – equity capital
These include the capital, reserves (including retained earnings) and profit and loss accounts of the reporting institution. They should be reported in the base currency of the reporting institution or in the currency in which the capital is denominated. Interest-bearing capital items (e.g. preference shares and subordinated debts) should be reported under items 6a, 7a or 8a as appropriate.
30. Item 5 row (QV) - other non-interest bearing liabilities
These include, for example, deposits in current accounts and other payables / liabilities which are non-interest bearing, and loan loss provisions etc. Non-remunerated deposits (e.g. deposits in current accounts) should be reported as non-maturity deposits (i.e. managed rate liabilities) under interest-bearing liabilities. General provisions should be reported in the base currency of the reporting institution. Other provisions should be reported in the currency of the underlying assets.
31. Item 5 Total (A to QV) - Total liabilities
Report the sum of total interest bearing and non-interest bearing liabilities. The amount reported may not necessarily be the same as the amount of “Total assets” reported under item 1 Total (A to PU). Locally incorporated and exempted institutions without overseas branches and institutions incorporated overseas should note that the amounts reported under this item, in respect of the positions for Hong Kong dollars and US dollars, should be consistent with the sum of the amounts of “Total liabilities” and “Provisions” reported under the relevant columns of item 11 and item 24 of Form MA(BS)1 respectively.
32. Item 9 – Total off-balance sheet positions

MA(BS)12 /P. 8 (06/2017)
Report in item 9a, the sum of all long positions reported under items 10a to 15a of the same row. Report in item 9b, the sum of all short positions reported under items 10b to 15b of the same row.
33. Item 10 - Forward foreign exchange contracts
Forward foreign exchange contracts include unmatured spot contracts that are for value not more than two business days after the transactions are contracted. They should be reported in the relevant page of the return for the currencies concerned and should be slotted into the appropriate time bands according to the residual maturity of the individual contracts. For example, a five-month forward contract to sell Hong Kong dollars for US dollars should be slotted in the return for the Hong Kong currency as a short position under item 10b of row (E) and in the return for the US currency as a long position under item 10a of row (E).
34. Item 11 - Interest rate swaps
An interest rate swap contract obligates an institution to both receive and remit interest payments that are based on the notional amount of the swap contract. Depending on the contract, the institution may receive fixed rate and pay floating rate interest on the notional principal or vice versa. For example, an interest rate swap under which an institution is receiving floating rate interest and paying fixed rate would be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing date and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap. The two positions should then be slotted into the appropriate time bands according to their respective maturities.
35. Item 12 - Cross currency swaps
The reporting treatment of a cross currency swap is similar to that of an interest rate swap, except for the fact that its long and short positions should be reported in the relevant time bands of the currencies concerned.
36. Item 13 - Futures / Forward rate agreements (FRAs)
These should be treated in the same way as a combination of a long and a short position in government securities. The maturity of a future or an FRA would be the period until delivery or exercise of the contract, plus  where applicable  the life of the underlying instruments. For example, a long position in a June three-month interest rate future should be reported in April in the same way as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months. Similarly, a seller of a 2 x 5 months FRA should report the transaction as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months. In respect of a futures contract, where a range of deliverable instruments may be delivered to fulfil the contract, the institution would be free to elect which deliverable security goes into the maturity ladder.

MA(BS)12 /P. 9 (06/2017)
37. Item 14 - Options
Report option contracts that are related to interest rate instruments and currencies. All bought and sold interest rate options should be reported. Embedded options that have been decomposed (see paragraph 14) should also be reported here. Report the estimated value of the option contracts to the option holder, which Option contracts should be reported by using the delta equivalent value of these contracts, which is calculated by multiplying the principal value of the underlying by the delta or, in the case of options on debt instruments, the market value of such debt instruments by the delta. (Such deltas are to be calculated according to the reporting institution's proprietary options pricing model.) Bought options should be reported as a long position and sold options should be reported as a short position. Report the total value of options only, i.e. no need to slot cash flows into time bands, under Item 14 Total. In slotting deltas into the time bands, a two-legged approach should be used as for other derivatives - one entry at the time the underlying contract takes effect and the other at the time the underlying contract matures. For instance, a bought call option on a June three-month interest rate future would in April be considered, on the basis of its "delta" equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months. A written option would be similarly included as a long position with a maturity of two months and a short position with a maturity of five months. The two-legged approach also applies to reporting positions of interest rate swaptions. For example, a bought swaption of receiving (paying) fixed rate with an option maturity of two months and an underlying interest rate swap of three years is reported as a long (short) position with a maturity of three years and two months and a short (long) position with a maturity of two months. Similarly, a written swaption of receiving (paying) fixed rate with an option maturity of two months and an underlying interest rate swap of three years is reported as a short (long) position with a maturity of three years and two months and a long (short) position with a maturity of two months. The amounts of the positions are the deltas of the notional amount of the underlying interest rate swap in respect of the type of the swaption. In the case of an option that gives rise to foreign currency exposures (e.g. currency option), the delta equivalent value of both the long and short positions should be reported in the time band corresponding to the exercise date of the contract. Report a long position in respect of the currency that the institution intends to take and a short position of the currency that the institution intends to deliver. An institution purchasing options to a limited extent for the purposes of hedging may report only those option contracts that are in-the-money. Instead of reporting their delta equivalent values, it
may report the notional value of the option contracts in rows (A) to (O) using the two-legged approach as mentioned above. As the methods of reporting some option instruments (e.g. digital options and barrier options) are rather complicated, institutions with such transactions should discuss with the HKMA the reporting method concerned.
38. Item 15 - Others

MA(BS)12 /P. 10 (06/2017)
Report , by using the two-legged approach, any other debt derivatives and off-balance sheet items the values of which are sensitive to changes in interest rates. This includes forward arrangements for fixed rate loans and fixed rate deposits which have been contracted but remain undrawn as at the reporting date. A forward loan should be reported as a long position at the time the loan matures and as a short position at the time when the loan is to be drawn. For forward deposits, the reporting method is the reverse. Institutions should also include fixed rate loan and fixed rate deposit commitments 11 under this item. Both retail and wholesale commitments should be included. Institutions should estimate the proportion of commitments that will be drawn-down and the expected tenor, based on historical data and using a sound and prudent methodology. The estimated cash flows should be reported following the reporting method for forward arrangements for fixed rate loans and fixed rate deposits. Where securities are sold subject to a repurchase agreement, the terms of which transfer substantially all risks and rewards of ownership to the buyer, the transaction should be separately accounted for as an outright sale plus a commitment to repurchase. The securities sold under such an agreement should not be reported in this return but the commitment to repurchase should be reported as a forward purchase of the securities. Where the price for the commitment to repurchase has not been determined, the fair value (i.e. current market price) as of the reporting date should be used. Where securities are purchased subject to a resale agreement, the terms of which transfer substantially all risks and rewards of ownership to the reporting institution, the transaction should be separately accounted for as an outright purchase plus a commitment to sell back. The securities purchased under such an agreement should be reported as an asset and the commitment to sell back as a forward sale of the securities. Where the price for the commitment to sell back has not been determined, the fair value (i.e. current market price) as of the reporting date should be used.
39. Item 16 - Net positions
This Item 16a (net positions excluding coupon cash flows) is the net amount of items 1a, 5a, 9a and 9b. Show figures in brackets to indicate a short position in any of the time bands. Item 16b (net positions including coupon cash flows) is item 16a plus any scheduled coupon cash flows 12 . For fixed rate positions, coupon payments should be slotted into the appropriate time bands according to their payment schedule until the contractual maturity 13 . For floating rate positions, coupon payments should be slotted into the appropriate time bands according to their payment schedule until the the next repricing date. Coupon cash flows on assets should be netted against coupon cash flows on liabilities if they are slotted into the same time band.

11 These are commitments by banks to allow customers to draw down a loan or place a deposit at a fixed rate within a limited future period. 12 These include any interest payment on a tranche of principal that has not yet been repaid or repriced. 13 In the case of cash flows with optionality (see Section 5.2 of the SPM), the cash flows slotted to each time band should be adjusted to take into account the expected prepayment or early withdrawal behaviour.

MA(BS)12 /P. 11 (06/2017)
Regarding commercial margins and other spread components, institutions have an explicit choice to either include or exclude them in the cash flows. If institutions have chosen to include commercial margins and other spread components in the cash flows, the spread components must be slotted according to their payment schedule until the contractual maturity 14 , irrespective of whether the notional principal has been repriced or not, provided that the notional principal has not yet been repaid and that the spread components do not reprice. The following example illustrates how coupon payments should be slotted for a floating rate loan with a notional amount of HKD 100 million. The loan expires after ten years and the interest rate is HIBOR+3% (payable annually). The current HIBOR is 2% and the next repricing date is in a year’s time. Including spread components Excluding spread components Next day or less:
2 to 7 days:
8 days to 1 month:
1 to 3 months:
3 to 6 months:
6 to 9 months:
9 to 12 months 5 2
1 to 1.5 years
1.5 to 2 years 3
2 to 3 years 3
3 to 4 years 3
4 to 5 years 3
5 to 6 years 3
6 to 7 years 3
7 to 8 years 3
8 to 9 years 3
9 to 10 years 3
10 to 15 years
15 to 20 years
More than 20 years
The following example illustrates how coupon payments should be slotted for a fixed rate loan with a notional amount of HKD 100 million. The loan expires after ten years. The interest rate on the loan, payable annually, is 5% including spread components and 4% excluding spread components.

14 In the case of floating rate loans subject to prepayment risk, the spread components slotted to each time band should be adjusted to take into account the expected prepayment behaviour.

MA(BS)12 /P. 12 (06/2017)
Including spread components
Excluding spread components
Next day or less:
2 to 7 days:
8 days to 1 month:
1 to 3 months:
3 to 6 months:
6 to 9 months:
9 to 12 months 5 4
1 to 1.5 years
1.5 to 2 years 5 4
2 to 3 years 5 4
3 to 4 years 5 4
4 to 5 years 5 4
5 to 6 years 5 4
6 to 7 years 5 4
7 to 8 years 5 4
8 to 9 years 5 4
9 to 10 years 5 4
10 to 15 years
15 to 20 years
More than 20 years
40. Item 17 – Earnings perspective (impact / scenario analysis)
The time weight on earnings under item 17a is used to measure the impact of an interest rate increase of 200 basis points on the earnings of the reporting institution in a period of 12 months. For example, if an institution has a positive position of $10 million in the fourth (1 to 3 months) time band, an increase in interest rates of 200 basis points would produce additional interest income of approximately $166,667 ($10,000,000 x 2% x 10/12) during the 12-month period. This assumes that all positions are repriced at the mid-point of each time band. Institutions should calculate the impact of the parallel up and parallel down scenario (see Section 5.3 of the SPM) on the earnings of the reporting institution in a period of 12 months. For a given currency 𝑐 and under scenario 𝑖, institutions should calculate the new net position (excluding coupon cash flows), as net positions under interest rate shock scenarios may vary depending on the way cash flows with optionality are slotted (the net positions should be consistent with those used for economic value impact – see Section
5.2 of the SPM). The new net position 𝑁𝑖,𝑐
(𝑘) at each time band 𝑘 should be weighted by a time weight (1 − 𝑡𝑘 ) ∙ ∆𝑟𝑖,𝑐 (𝑘), where ∆𝑟𝑖,𝑐 (𝑘) denotes the change in interest rates under scenario 𝑖 and 𝑡𝑘 denotes the midpoint of each time band (under Item 17a). For example, for a parallel increase of 200 basis points across the yield curve, Tthe time weights of individual time bands are thusshould be computed as follows:

MA(BS)12 /P. 13 (06/2017)
Next day or less: (1 − 1/360) ∙ 2%(364.5 /
365) x 2%
= 1.994%= 1.997%
2 to 7 days: (1 − 4.5/360) ∙ 2% (360.5
/ 365) x 2%
= 1.975%= 1.975%
8 days to 1 month: (1 − 19/360) ∙ 2% (346 /
365) x 2%
= 1.894%= 1.896%
1 to 3 months: (1 − 60/360) ∙ 2% (10 /
12) x 2%
= 1.667%= 1.667%
3 to 6 months: (1 − 135/360) ∙ 2%(7.5 /
12) x 2%
= 1.250%= 1.250%
6 to 12 9 months: (1 − 225/360) ∙ 2% (3 /
12) x 2%
= 0.750%= 0.500%
9 to 12 months (1 − 315/360) ∙ 2% = 0.250%
Report the weighted net position 𝑁𝑖,𝑐
(𝑘) ∙ (1 − 𝑡𝑘
) ∙ ∆𝑟𝑖,𝑐
(𝑘) under items 17b and 17c of each time band. The total impact on earnings over the next 12 months should be calculated by summing the weighted positions in different time bands up to 12 months, as computed by multiplying the net position in each time band reported under item 16 by the corresponding time weight specified under item 17a. reported under Item 17. The amounts reported, with short positions shown in brackets, should be rounded to the nearest HK$ Million without decimal place.
41. Item 18 – Economic value perspective (impact / scenario analysis)
Institutions should calculate the impact of the six interest rate shock scenarios (see Section
5.3 of the SPM) on economic value of equity (EVE). The HKMA applies a standardised
200-basis-point parallel rate shock to institutions’ interest rate risk exposures to measure the economic value impact of the shock. TFor each given currency 𝑐, the impact of the shock is calculated as follows:
 identify the current risk-free rate15
, denote by 𝑟0,𝑐
(𝑘), at the midpoint of each time band 𝑘;
 multiply the net position reported under item 16 by the corresponding weighting factor16 under item 18a to obtain a weighted position in each time bandreport under Item 18a the current EVE (𝐸0,𝑐 (𝑘)) for each time band 𝑘 (with midpoint 𝑡𝑘 under item 17a), by multiplying the net position 𝐶𝐹0,𝑐 (𝑘) reported under item 16b by a continuously compounded discount factor17

15 This may be determined, for example, based on a secured interest rate swap curve. Institutions may include commercial margin and other spread components in the risk-free rate only if they have been included in the cash flows (see paragraph 39). 16 Adopted from the Basel Committee’s consultative paper on “Principles for the Management and Supervision of Interest Rate Risk” issued in January 2001, the weighting factors are designed to reflect the sensitivity of positions in different time bands to an assumed parallel shift of 200 basis points throughout the time spectrum. The factors are based on a proxy of modified duration of positions situated at the middle of each time band and yielding 5%, and have been found to be in line with the term structure of Hong Kong dollar interest rates. 17 For the purpose of calculating the EVE impact only, institutions also have the option to slot cash flows onto time band midpoints (under Item 17a) rather than time bands. This option requires splitting up notional repricing cash

MA(BS)12 /P. 14 (06/2017)
𝐸0,𝑐
(𝑘) = 𝐶𝐹0,𝑐
(𝑘) ∙ 𝑒𝑥𝑝(−𝑟0,𝑐
(𝑘) ∙ 𝑡𝑘);
 report in row (U) under Item 18a the net value of interest rate options (the net amount of Item 14a Total and Item 14b Total).  for each scenario 𝑖, identify the new interest rate 𝑟𝑖,𝑐 (𝑘) at the midpoint of each time band 𝑘 , calculate the new net position 𝐶𝐹𝑖,𝑐 (𝑘) (as net positions under interest rate shock scenarios may vary depending on the way cash flows with optionality are slotted), and calculate the impact on EVE as ∆𝐸𝑖,𝑐 (𝑘) = 𝐸0,𝑐 (𝑘) − 𝐶𝐹𝑖,𝑐 (𝑘) ∙ 𝑒𝑥𝑝(−𝑟𝑖,𝑐 (𝑘) ∙ 𝑡𝑘);  report the amount (with short positions shown in brackets) under item 18b of each time band and round the amount to the nearest HK$ Million without decimal place;  calculate the net value of interest rate options 𝑉𝐴𝑂𝑖,𝑐 using the new yield curve under each interest rate shock scenario 𝑖, and assuming a relative increase in the implicit volatility of 25%;  report in row (U) under Item 18 the interest rate option risk measure 𝐾𝐴𝑂𝑖,𝑐 under each scenario 𝑖, calculated as 𝐾𝐴𝑂𝑖,𝑐 = 𝑉𝐴𝑂0,𝑐 − 𝑉𝐴𝑂𝑖,𝑐 , where 𝑉𝐴𝑂0,𝑐 denotes the current net value of interest rate options (as reported in row (U) under Item 18a);  report the sum of the weighted positions of all time bands in Total (A to OU) under item 18; report zero if the sum is less than zero, i.e. ∆𝐸𝑖,𝑐 = 𝑚𝑎𝑥(0, ∑ ∆𝐸𝑖,𝑐 (𝑘) 𝑘 + 𝐾𝐴𝑂𝑖,𝑐);b;  report the total capital basetier 1 capital of the institution at the reporting date in row (PV) under item 18b. For overseas incorporated institutions, they should report the total capital base tier 1 capital of their head office; and  express the impact on economic valueEVE as a percentage of total capital basetier 1 capital under item 18b.
42. Item 19 – Basis risk (impact / scenario analysis)
Impact on earnings of an institution due to basis risk is measured by the following two scenarios:
(i) all rates except for fixed and managed rates on interest bearing assets rise by 200 basis points; and

flows between two adjacent time band midpoints. Institutions using this option should re-calculate the net positions on this basis and then discount them using the relevant interest rates.

MA(BS)12 /P. 15 (06/2017)
(ii) managed rates on interest bearing assets drop by 200 basis points while other rates remain unchanged. The impact on earnings is calculated under item 19 by assuming that the changes in interest rates last for different periods of time (one month, three months, six months and 12 months) under both scenarios. Both on- and off-balance sheet positions should be included. The calculation is similar to that under the earnings perspective (see item 17 above) except that different types of interest rates are subject to different changes and that the current net position (rather than new net positions under interest rate shock scenarios 18) should be used. For example, if an institution has total managed rate assets of $50 million and $950 million respectively in the second (2 to 7 days) and the fourth (1 to 3 months) time bands, a drop of 200 basis points in managed rates for three months (assuming 90 days) would reduce interest income from the assets by approximately $1.817 821 million during the period. The computation (assuming that all positions are repriced at the mid-point of each time band) is as follows:
Time Band Time Weight Position Impact on earnings (for a drop of 90 days) $ million $ million Next day or less: (90−1) ∙ −2% = −0.494%(89.5 / 365) x -2% = -0.490% 0 0 2 to 7 days: (90−4.5) ∙ −2% = −0.475%(85.5 / 365) x -2% = -0.468% 50 -0.234238 8 days to 1 month: (90−19) ∙ −2% = −0.394%(71 / 365) x -2% = -0.389% 0 0 1 to 3 months: (90−60) ∙ −2% = −0.167%(1 / 12) x -2% = - 0.167% 950 -1.583 3 to 6 months: NA 0 NA 6 to 12 months: NA 0 NA Total = -1.817821

18 Nevertheless, for floating rate assets that are subject to a cap based on a managed rate, e.g. a HIBOR-based mortgage subject to a cap based on prime, they should be re-classified as managed rate assets if the cap becomes binding under the relevant scenario for the purpose of calculating the impact on earnings due to basis risk.

MA(BS)12 /P. 16 (06/2017)
Hong Kong Monetary Authority
December 2003June 2017

MA(BS)12 /P. 17 (06/2017)
Annex 1
EXAMPLE BANK (non-exempted institution) Position as at Day 0 (The following on- and off-balance sheet items in the banking book will be shown in pages 1 to 8 of the sample return forms that follow. Current risk-free rates are assumed to be 0.5% p.a. across all maturities. Commercial margin and other spread components are not included.) A. BALANCE SHEET Ref Particulars HKD USD Total ASSETS (a) 5-month retail fixed rate loans (0.5% interest paid at maturity, no prepayment risk)5-month fixed rate loans 300 300 (b) 2-year retail fixed rate loans (1% interest paid annually, subject to prepayment risk with CPR=0.2 in the first year)2- year fixed rate loans 500 500 (c) 1-year fixed rate mortgage loans (1% interest paid annually, no prepayment risk)1-year fixed rate mortgage loans 200 200 (d) 4-month fixed rate mortgage loans (0.3% interest paid at maturity, no prepayment risk)4-month fixed rate mortgage loans 100 100 (e) 2-month floating rate loans (0.1% interest paid monthly, next repricing in 2 months)2-month variable rate loans 400 400 (f) 15-year fixed rate bonds (1% coupon paid annually, no prepayment risk)15-year fixed rate bonds 200 200 (g) 3-month retail fixed rate loans (0.25% interest paid at maturity, no prepayment risk)3-month fixed rate loans 250 250 (h) Other non-interest bearing assetsOther non-interest bearing assets 180 180 (i) 3-year fixed rate mortgage loans (1% interest paid annually, no prepayment risk)3-year fixed rate mortgage loans 800 800 (j) 20-year managed rate mortgage loans (0.1% interest paid monthly, to be repriced in 2 months’ time and 5% repayable within 7 days)20-year managed rate mortgage loans (to be repriced in 2 months’ time and 5% repayable within 7 days) 1000 1000 3180 750 3930 LIABILITIES (aa) 5-month fixed rate deposits (0.5% interest paid at maturity, no early redemption risk)5-month fixed rate deposits 300 300 (bb) 2-year floating rate deposits (0.1% interest paid monthly, to be repriced in 3 months’ time)2-year variable rate deposits 500 500

MA(BS)12 /P. 18 (06/2017)
(to be repriced in 3 months’ time)
(cc) 1-year fixed rate deposits (1% interest paid at maturity, no early redemption risk)1-year fixed rate deposits 200 200 (dd) 7-month fixed rate deposits (0.5% interest paid at maturity, no early redemption risk)10-month fixed rate deposits 100 100 (ee) 18-month fixed rate deposits (1.5% interest paid at maturity, no early redemption risk)18-month fixed rate deposits 400 400 (ff) 2-month fixed rate deposits (0.2% interest paid at maturity, no early redemption risk)2-month fixed rate deposits 200 200 (gg) 6-month fixed rate deposits (0.5% interest paid at maturity, no early redemption risk)6-month fixed rate deposits 250 250 (hh) CapitalCapital 180 180 (ii) 4-year fixed rate retail deposits (1% interest paid annually, subject to early redemption with TDRR=0.4)4-year fixed rate CDs 400 400 800 (jj) Savings Non-maturity deposits 1000 1000 2880 1050 3930 B. OFF-BALANCE SHEET POSITIONS Ref. Type Notional Principal Particulars (a)/(aa) Forward FX contracts 300 Buy HKD sell USD in 5 months' time. (b)/(bb) Interest Rate Swaps 500 Final maturity of the HKD interest rate swap is 2 years. The bank pays fixed and receives floating rate. The floating rate is to be repriced in 3 months' time. (c)/(cc) Currency Swaps 200 This being a 1-year HKD/USD swap. During the life of the swap, the bank pays HKD interest and receives USD interest. At maturity, the bank pays the principal in HKD and receives the principal in USD. (d)/(dd) Interest Rate Futures 100 The bank takes a long position in a 6-month interest rate future contract delivery of which will take effect in 4 months' time. (e)/(ee) Forward Rate Agreements 400 The bank writes a 2 against 18 forward rate agreement on HKD interest rates. (f)/(ff) Put options 200* An option has been bought to sell the USD straight bond which is now held by the bank and which will mature in 15 years' time. The option may be exercised in 2 months' time.

MA(BS)12 /P. 19 (06/2017)
(g)/(gg) Call options 250* A call option on 3-month US Treasury Bill has been bought. The option may be exercised in 3 months' time. (* Delta equivalent values.

MA(BS)12 /P. 20 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): HONG KONG DOLLAR Page 1 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING ASSETS (Note (3))
  TIME BAND

1. Total interest bearing assets 2. Fixed rate assets 3. Floating rate assets 4. Managed rate assets
   a.
   Total b.
   Residential mortgage loans c.
   Total weighted average yield d.
   Weighted average yield
   (Residential mortgage loans) a.
   Total b.
   Residential mortgage loans c.
   Residential mortgage loans subject to prepayment risk d.
   Other loans subject to prepayment risk a.
   Total b.
   Residential mortgage loans a.
   Total b.
   Residential mortgage loans
   2a+3a+4a 2b+3b+4b
   Next day or less (A) % %
   2 to 7 days (B) 50 50 % % 50 50 (j)
   8 days to 1 month (C) % %
   1 to 3 months (D) 1350 950 % % 400 (e) 950 950 (j) 3 to 6 months (E) 100 100 % % 100 100 (d) 6 to 9 months (F) % % 9 to 12 months (G) 300 200 % % 300 200 (c) 0.2×500 (b) 1 to 1.5 years (H) % %
   1.5 to 2 years (I) 400 % % 400 0.8×500 (b)
   2 to 3 years (J) 800 800 % % 800 800 (i)
   3 to 4 years (K) % %
   4 to 5 years (L) % %
   5 to 6 years (M) % %
   6 to 7 years (N) % %
   7 to 8 years (O) % %
   8 to 9 years (P) % %
   9 to 10 years (Q) % %
   10 to 15 years (R) % %
   15 to 20 years (S) % %
   More than 20 years (T) % %
   Total interest bearing assets Total (A to T) 3000 2100 1600 1100 500 400 1000 1000 Non-interest bearing assets (U) 180 (h) Total assets Total (A to U) 3180 Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

MA(BS)12 /P. 21 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): HONG KONG DOLLAR Page 2 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING LIABILITIES (Note (3))
  TIME BAND

5. Total interest bearing liabilities 6. Fixed rate liabilities 7. Floating rate liabilities 8. Managed rate liabilities
   a.
   Total b.
   Deposits c.
   Total weighted average interest costs d.
   Weighted average interest costs
   (Deposits) a.
   Total b.
   Deposits c.
   Deposits subject to early redemption risk d.
   Other liabilities subject to early redemption risk a.
   Total b.
   Deposits a.
   Total b.
   Deposits
   6a+7a+8a 6b+7b+8b
   Next day or less (A) 1160 1160 % % 160 0.4×400 (ii) 1000 1000 (jj) 2 to 7 days (B) % % 8 days to 1 month (C) % % 1 to 3 months (D) 500 500 % % 500 500 (bb) 3 to 6 months (E) 300 300 % % 300 300 (aa) 6 to 9 months (F) 100 100 % % 100 100 (dd) 9 to 12 months (G) % % 1 to 1.5 years (H) 400 400 % % 400 400 (ee)
   1.5 to 2 years (I) % %
   2 to 3 years (J) % %
   3 to 4 years (K) 240 240 % % 240 (1-0.4)×400 (ii) 4 to 5 years (L) % % 5 to 6 years (M) % % 6 to 7 years (N) % % 7 to 8 years (O) % % 8 to 9 years (P) % % 9 to 10 years (Q) % % 10 to 15 years (R) % % 15 to 20 years (S) % % More than 20 years (T) % % Total book value Total (A to T) 2700 2700 1200 800 0 500 500 1000 1000 Non-interest bearing liabilities (U)+(V) 180 Equity capital (U) 180 (hh) Others (V) Total liabilities Total (A to V) 2880 Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions. Non-maturity deposits may be reported based on behavioural maturity according to the methodology provided in the Completion Instructions.

MA(BS)12 /P. 22 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): HONG KONG DOLLAR Page 3 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  OFF-BALANCE SHEET POSITIONS (Note (3))
  TIME BAND

9. Total
10. Forward
    foreign exchange contracts
11. Interest rate
    swaps
12. Cross currency
    swaps
13. Futures /
    FRAs 14. Options 15. Others a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short
    10a+11a+12a+ 10b+11b+12b+
    13a+14a+15a 13b+14b+15b
    Next day or less (A)
    2 to 7 days (B)
    8 days to 1 month (C)
    1 to 3 months (D) 500 400 500 (b) 400 (ee)
    3 to 6 months (E) 300 100 300 (a) 100 (dd)
    6 to 9 months (F)
    9 to 12 months (G) 100 200 200 (cc) 100 (d)
    1 to 1.5 years (H) 400 400 (e)
    1.5 to 2 years (I) 500 500 (bb)
    2 to 3 years (J)
    3 to 4 years (K)
    4 to 5 years (L)
    5 to 6 years (M)
    6 to 7 years (N)
    7 to 8 years (O)
    8 to 9 years (P)
    9 to 10 years (Q)
    10 to 15 years (R)
    15 to 20 years (S)
    More than 20 years (T)
    Total off-balance sheet positions Total (A to T) 1300 1200 300 500 500 200 500 500 Notes:
    (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

MA(BS)12 /P. 23 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): HONG KONG DOLLAR Page 4 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  IMPACT / SCENARIO ANALYSIS
  TIME BAND
  16.
  Net positions
  17.
  Earnings perspective
  18.
  Economic value perspective
  19.
  Basis risk a.
  Excluding coupon cash flows b.
  Including coupon cash flows a.
  Time band mid￾point
  (years) b.
  Impact on earnings over the next 12 months
  (parallel up) c.
  Impact on earnings over the next
  12 months
  (parallel down) a.
  Current
  EVE b.
  Impact on EVE
  (parallel up) c.
  Impact on
  EVE
  (parallel down) d.
  Impact on
  EVE
  (steepener) e.
  Impact on
  EVE
  (flattener) f.
  Impact on
  EVE
  (short rates up) g.
  Impact on
  EVE
  (short rates down)
  Period for which changes in interest rates last Scenario (i) All rates except for fixed and managed rates on interest bearing assets rise by 200 bps Scenario (ii) Managed rates on interest bearing assets drop by 200 bps while other rates remain unchanged 1a-5a +9a-9b Next day or less (A) -1160 -1160 0.0028 -24 22 -1160 32 -32 -32 -32 1 month (2) (0) 2 to 7 days (B) 50 50 0.0125 1 -1 50 3 months (6) (2) 8 days to 1 month (C) 0 1 0.0528 0 0 1 0 6 months (12) (7) 1 to 3 months (D) 950 950 0.1667 16 -16 950 3 -3 -2 2 3 -3 12 months (25) (17) 3 to 6 months (E) 0 -1 0.375 0 0 -1 0 6 to 9 months (F) -100 -101 0.625 -1 1 -100 -1 -1 -1 1 9 to 12 months (G) 200 213 0.875 0 -1 212 23 -24 19 -18 22 -23 1 to 1.5 years (H) 0 -6 1.25 -6 0
  1.5 to 2 years (I) -100 -90 1.75 -90 -23 24 -19 19 -22 23
  2 to 3 years (J) 800 806 2.5 796 39 -40 3 6 21 -21 3 to 4 years (K) -240 -242 3.5 -238 -46 51 27 -32 -38 40 4 to 5 years (L) 4.5 5 to 6 years (M) 5.5 6 to 7 years (N) 6.5 7 to 8 years (O) 7.5 8 to 9 years (P) 8.5 9 to 10 years (Q) 9.5 10 to 15 years (R) 12.5 15 to 20 years (S) 17.5 More than 20 years (T) 25 Options (U) Total (A to U) -7 6 27 0 0 8 17 0 Tier 1 capital at reporting date (Note (3)) (V) 180 Impact on EVE as % of Tier 1 capital (A to U) / (V) 15% 0% 0% 4% 10% 0% Notes:
  (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report the Tier 1 capital for all currencies. Overseas incorporated institutions should refer to the Tier 1 capital of their head office.

MA(BS)12 /P. 24 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): U.S. DOLLAR Page 5 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING ASSETS (Note (3))
  TIME BAND

1. Total interest bearing assets 2. Fixed rate assets 3. Floating rate assets 4. Managed rate assets
   a.
   Total b.
   Residential mortgage loans c.
   Total weighted average yield d.
   Weighted average yield
   (Residential mortgage loans) a.
   Total b.
   Residential mortgage loans c.
   Residential mortgage loans subject to prepayment risk d.
   Other assets subject to prepayment risk a.
   Total b.
   Residential mortgage loans a.
   Total b.
   Residential mortgage loans
   2a+3a+4a 2b+3b+4b
   Next day or less (A) % %
   2 to 7 days (B) % %
   8 days to 1 month (C) % %
   1 to 3 months (D) 250 % % 250 (g)
   3 to 6 months (E) 300 % % 300 (a)
   6 to 9 months (F) % %
   9 to 12 months (G) % %
   1 to 1.5 years (H) % %
   1.5 to 2 years (I) % %
   2 to 3 years (J) % %
   3 to 4 years (K) % %
   4 to 5 years (L) % %
   5 to 6 years (M) % %
   6 to 7 years (N) % %
   7 to 8 years (O) % %
   8 to 9 years (P) % %
   9 to 10 years (Q) % %
   10 to 15 years (R) 200 % % 200 (f)
   15 to 20 years (S) % %
   More than 20 years (T) % %
   Total interest-bearing assets Total (A to T) 750 750 Non-interest bearing assets (U) Total assets Total (A to U) 750 Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

MA(BS)12 /P. 25 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): U.S. DOLLAR Page 6 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  INTEREST BEARING LIABILITIES (Note (3))
  TIME BAND

5. Total interest bearing liabilities 6. Fixed rate liabilities 7. Floating rate liabilities 8. Managed rate liabilities
   a.
   Total b.
   Deposits c.
   Total weighted average interest costs d.
   Weighted average interest costs
   (Deposits) a.
   Total b.
   Deposits c.
   Deposits subject to early redemption risk d.
   Other liabilities subject to early redemption risk a.
   Total b.
   Deposits a.
   Total b.
   Deposits
   6a+7a+8a 6b+7b+8b
   Next day or less (A) 160 160 % % 160 0.4×400 (ii) 2 to 7 days (B) % % 8 days to 1 month (C) % % 1 to 3 months (D) 200 200 % % 200 200 (ff) 3 to 6 months (E) 250 250 % % 250 250 (gg) 6 to 9 months (F) % % 9 to 12 months (G) 200 200 % % 200 200 (cc) 1 to 1.5 years (H) % %
   1.5 to 2 years (I) % %
   2 to 3 years (J) % %
   3 to 4 years (K) 240 240 % % 240 (1-0.4)×400 (ii) 4 to 5 years (L) % % 5 to 6 years (M) % % 6 to 7 years (N) % % 7 to 8 years (O) % % 8 to 9 years (P) % % 9 to 10 years (Q) % % 10 to 15 years (R) % % 15 to 20 years (S) % % More than 20 years (T) % % Total book value Total (A to T) 1050 650 400 Non-interest bearing liabilities (U)+(V) Equity capital (U) Others (V) Total liabilities Total (A to V) 1050 Notes:
   (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

MA(BS)12 /P. 26 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): U.S. DOLLAR Page 7 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  OFF-BALANCE SHEET POSITIONS (Note (3))
  TIME BAND

9. Total 10. Forward foreign
   exchange contracts
10. Interest rate
    swaps
11. Cross currency
    swaps
12. Futures /
    FRAs 14. Options 15. Others a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short a.
    Long b.
    Short
    10a+11a+12a+ 10b+11b+12b+
    13a+14a+15a 13b+14b+15b
    Next day or less (A)
    2 to 7 days (B)
    8 days to 1 month (C)
    1 to 3 months (D)
    3 to 6 months (E) 300 300 (aa)
    6 to 9 months (F)
    9 to 12 months (G) 200 200 (c)
    1 to 1.5 years (H)
    1.5 to 2 years (I)
    2 to 3 years (J)
    3 to 4 years (K)
    4 to 5 years (L)
    5 to 6 years (M)
    6 to 7 years (N)
    7 to 8 years (O)
    8 to 9 years (P)
    9 to 10 years (Q)
    10 to 15 years (R)
    15 to 20 years (S)
    More than 20 years (T)
    Total off-balance sheet positions Total (A to T) 200 300 300 200 Notes:
    (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report items under different time bands based on the earliest interest repricing date as specified in the Completion Instructions.

MA(BS)12 /P. 27 (06/2017)
Currency Code
(For Official Use Only)
Interest Rate Risk Exposures
Position of * Banking Book / Trading Book and Banking Book (Note (1)) Currency (Note (2)): U.S. DOLLAR Page 8 of 8

• Delete where inappropriate. (In HK$ Million or equivalent)
  IMPACT / SCENARIO ANALYSIS
  TIME BAND
  16.
  Net positions
  17.
  Earnings perspective
  18.
  Economic value perspective
  19.
  Basis risk a.
  Excluding coupon cash flows b.
  Including coupon cash flows a.
  Time band mid￾point
  (years) b.
  Impact on earnings over the next 12 months
  (parallel up) c.
  Impact on earnings over the next
  12 months
  (parallel down) a.
  Current
  EVE b.
  Impact on EVE
  (parallel up) c.
  Impact on
  EVE
  (parallel down) d.
  Impact on
  EVE
  (steepener) e.
  Impact on
  EVE
  (flattener) f.
  Impact on
  EVE
  (short rates up) g.
  Impact on
  EVE
  (short rates down)
  Period for which changes in interest rates last Scenario (i) All rates except for fixed and managed rates on interest bearing assets rise by 200 bps Scenario (ii) Managed rates on interest bearing assets drop by 200 bps while other rates remain unchanged 1a-5a +9a-9b Next day or less (A) -160 -160 0.0028 -4 3 -160 32 -32 -32 -32 1 month 2 to 7 days (B) 0.0125 0 3 months (1) 8 days to 1 month (C) 0.0528 0 6 months (4) 1 to 3 months (D) 50 50 0.1667 1 -1 50 12 months (13) 3 to 6 months (E) -250 -250 0.375 -3 3 -249 -2 2 1 -1 -2 2 6 to 9 months (F) 0.625 0 9 to 12 months (G) 0 -2 0.875 0 0 -2 0 1 to 1.5 years (H) 0 0 1.25 0
  1.5 to 2 years (I) 0 0 1.75 0
  2 to 3 years (J) 0 0 2.5 0
  3 to 4 years (K) -240 -240 3.5 -236 -46 51 27 -32 -38 40 4 to 5 years (L) 0 2 4.5 2 0 5 to 6 years (M) 0 2 5.5 2 0 6 to 7 years (N) 0 2 6.5 2 0 7 to 8 years (O) 0 2 7.5 2 0 8 to 9 years (P) 0 2 8.5 2 0 9 to 10 years (Q) 0 2 9.5 2 0 10 to 15 years (R) 200 210 12.5 197 44 -56 37 -28 2 -2 15 to 20 years (S) 17.5 More than 20 years (T) 25 Options (U) Total (A to U) -6 5 29 0 35 0 0 8 Tier 1 capital at reporting date (Note (3)) (V) 180 Impact on EVE as % of Tier 1 capital (A to U) / (V) 16% 0% 19% 0% 0% 4% Notes:
  (1) Locally incorporated authorized institutions subject to the market risk capital adequacy regime are required to report positions in the banking book only. Other locally incorporated institutions exempted from the market risk capital adequacy regime and overseas incorporated institutions are required to report aggregate positions in the banking book and trading book. (2) Report interest rate risk exposures in major currencies as defined in the Completion Instructions, including at least Hong Kong dollar and US dollar (nil returns are required for these two currencies). Use the same return form for each currency. (3) Report the Tier 1 capital for all currencies. Overseas incorporated institutions should refer to the Tier 1 capital of their head office.

MA(BS)12 /P. 28 (06/2017)
Annex 2
Use of behavioural maturity for reporting interest rate risks [whole section deleted]
Annex 3
Computation of weighted averaged yield / weighted average interest costs [whole section deleted]

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Interest Rate Risk Exposures (Supplementary Information) Position of * Banking Book / Trading Book and Banking Book Currency: Hong Kong Dollar

• Delete where inappropriate. (In HK$ Million)
  INTEREST BEARING LIABILITIES (Note (1))

1. Total interest bearing liabilities
   TIME BAND a.
   Total b.
   Deposits c.
   Total weighted average interest costs d.
   Weighted average interest costs
   (Deposits)
   Next day or less (A) % %
   2 to 7 days (B) % %
   8 days to 1 month (C) % %
   1 to 3 months (D) % %
   3 to 6 months (E) % %
   6 to 12 months (F) % %
   1 to 2 years (G) % %
   2 to 3 years (H) % %
   3 to 4 years (I) % %
   4 to 5 years (J) % %
   5 to 7 years (K) % %
   7 to 10 years (L) % %
   10 to 15 years (M) % %
   15 to 20 years (N) % %
   More than 20 years (O) % %
   Total book value Total (A to O) % %
   Non-interest bearing liabilities (P)+(Q)
   Equity capital (P)
   Others (Q)
   Total liabilities Total (A to Q)
   Note:
   (1) Authorized institutions can choose to report either detailed statistics or the aggregate figures. Please refer to item 14 of Specific Instructions under Section C of the Completion Instructions for details. MA(BS)12(i)

MA(BS)12(i) /P. 1 (06/2017)
Completion Instructions
Return of Interest Rate Risk Exposures (Supplementary Information) (Form MA(BS)12(i)) Introduction

1. This return collects supplementary information on the weighted average interest costs of
   interest bearing liabilities denominated in Hong Kong dollars of authorized institutions on a monthly basis. The reporting items are the same as those of interest bearing and noninterest bearing liabilities in Hong Kong dollars in the Return of Interest Rate Risk Exposures (Form MA(BS)12). The corresponding reporting requirements are in general the same.
2. The information collected from this return will be used for the compilation of the monthly
   composite interest rate for Hong Kong, which aims to provide an overall picture of the average interest cost of funds in the banking sector, and its changes over time.
3. The Completion Instructions contain three sections. Section A describes the general
   reporting requirements. Section B provides definitions and clarification of certain items.
   Section C explains the specific reporting requirements for each item in the return form.
   Section A : General Instructions
4. Authorized institutions are required to complete this return showing their positions as at the
   last calendar day of each month and submit the return to the HKMA not later than 14 days after the end of each month. If the submission deadline falls on a public holiday, it will be deferred to the next working day. Locally incorporated institutions should complete the return on a solo basis. They may choose to report, consistently, either the positions of their local offices or the combined positions of their local and overseas offices. Overseas incorporated institutions are required to report the positions of their Hong Kong operations only.
5. This return captures on-balance sheet liabilities. Locally incorporated institutions subject
   to the market risk capital adequacy regime 1
   (“non-exempted institutions”) are required to report positions of the banking book only. Other institutions, i.e. those locally incorporated and exempted from the market risk capital adequacy regime (“exempted institutions”) and those incorporated overseas, should report aggregate positions of the banking book and trading book.
6. All the positions captured by this return should be slotted into the appropriate time bands
   according to the earliest interest repricing date (see paragraph 8 below). Institutions that meet the criteria set out in Annex 2 of the Completion Instructions of Form MA(BS)12 may, subject to the HKMA’s approval, slot their positions into different time bands based

1 The details of the market risk capital adequacy regime, including the de minimis exemption criteria and other requirements relevant to exempted institutions, are set out in the Banking (Capital) Rulesstatutory guideline “Maintenance of Adequate Capital Against Market Risk” (CA-G-2) in the Supervisory Policy Manual.

MA(BS)12(i) /P. 2 (06/2017) on their estimation of the respective behavioural maturity. Institutions are allowed to phase in the use of behavioural maturity on a product-by-product basis.
7. Unless otherwise stated, book value should be used for reporting purposes. Amounts are
to be shown to the nearest million, in Hong Kong dollars.
Section B : Definitions and Clarification
8. In respect of different interest bearing liabilities, the earliest interest repricing date is used
according to the instructions in paragraph 11 of the Completion Instructions of Form MA(BS)12. The methodology for slotting of cash flows should be consistent between this return and Form MA(BS)12.
9. For the purpose of this return, interest bearing liabilities include those which do not involve
any formal payment of interest but the values of which are sensitive to interest rate movements. Typically, these include financial instruments which are sold at a discount such as Exchange Fund Bills and zero coupon bonds.
10. Institutions should report under item 1b the amount of deposits. Deposits are deposit
liabilities due to non-bank customers, as defined under item 6 of the Return of Assets and Liabilities (Form MA(BS)1).
11. In respect of liabilities with embedded options, institutions should decompose them into
embedded options and underlying liabilities according to the instructions in paragraph 14 of the Completion Instructions of Form MA(BS)12. The underlying liabilities should be slotted into the appropriate time bands according to their earliest interest repricing date (see paragraph 8 above). The embedded options should not be reported. In the case of liabilities with an early redemption option (by either the reporting institution or its counterparty), and the institutions concerned cannot decompose them into the embedded option and underlying liabilities, the reporting may be based on the institution’s expectation of whether an early redemption will occur. Such liabilities should then be slotted into the appropriate time bands according to their earliest interest rate repricing date or the redemption date, whichever is the earlier.
12. Liabilities which are repayable by instalments rather than by one lump sum at maturity
should be broken down into individual tranches and slotted into the appropriate time bands according to the repricing date of each tranche.
13. Institutions which have the practice of raising internal deals to record positions passed from
one unit to another (e.g. Money Market Department to Foreign Exchange Department) within the same institution should not report these internal deals. However, this rule does not apply to an institution incorporated overseas, if the deals in question were executed between the institution's Hong Kong office and its overseas head office or branches. For the purpose of this return, internal deals are transactions between units within the relevant reporting scope (see paragraph 4 above) of the institution. Internal deals within the banking book should not be reported. The reporting method for internal deals should be consistent between this return and Form MA(BS)12.

MA(BS)12(i) /P. 3 (06/2017)
Section C : Specific Instructions
14. Item 1 rows (A) to (O) and row Total (A to O) – Total interest bearing liabilities
Report items 1a and 1b for all time bands in row (A) to row (O) and row Total (A to O) under the respective items. Report the weighted average costs of total interest bearing liabilities and deposits under items 1c and 1d respectively of the same row for rows (A) to (O). All the rates reported should be rounded to 2 decimal places. An example showing the method of calculation is given at Annex 1. Interest rates applicable at the reporting date should be used for the purpose of calculation. The institution does not need to report items 1c and 1d for row Total (A to O). Alternatively, the institution may choose to report the total book value of items 1a and 1b for row Total (A to O) and the total weighted average costs for all interest bearing liabilities and the weighted average costs of deposits of items 1c and 1d respectively for row Total (A to O), instead of reporting the figures of items 1a, 1b, 1c and 1d for rows (A) to (O).
15. Item 1 row (P)+(Q) – Non-interest bearing liabilities
Report the sum of equity capital and others.
16. Item 1 row (P) – equity capital
These include the capital, reserves (including retained earnings) and profit and loss accounts of the reporting institution and should be reported in the same manner as the reporting of these items in Form MA(BS)12. Interest-bearing capital items (e.g. preference shares and subordinated debts) should be reported under interest-bearing liabilities as appropriate.
17. Item 1 row (Q) - other non-interest bearing liabilities
These include, for example, deposits in current accounts and other payables / liabilities which are non-interest bearing, and loan loss provisions etc. Non-remunerated deposits (e.g. deposits in current accounts) should be reported as non-maturity deposits under interest-bearing liabilities, in the same manner as the reporting of these items in Form MA(BS)12. General provisions and other provisions should be reported in the same manner as the reporting of these items in Form MA(BS)12.
18. Item 1 Total (A to Q) - Total liabilities
Report the sum of total interest bearing and non-interest bearing liabilities. Locally incorporated and exempted institutions without overseas branches and institutions incorporated overseas should note that the amounts reported under this item, in respect of the positions for Hong Kong dollars, should be consistent with the sum of the amounts of “Total liabilities” and “Provisions” reported under the relevant columns of item 11 and item 24 of Form MA(BS)1 respectively.

MA(BS)12(i) /P. 4 (06/2017)
Hong Kong Monetary Authority
January June 20062017

MA(BS)12(i) /P. 5 (06/2017)
Annex 1
Computation of weighted average interest costs The following is an example showing the method of calculating the weighted average interest costs:
(Please note that the rates used are for illustration only. Reporting institutions should use the actual rates that are applicable to their interest bearing liabilities.) Items 1a, 1b Amount reported Of which Row (A) 100 20 are priced at 2% per month and 80 are priced at 8% per annum Row (B) 350 200 are priced at 10% and 150 are priced at 9% per annum Row (C) 50 50 are priced at 12% per annum Row (D) 0 Row (E) 0 Row (F) 0 Row (G) 0 Row (H) 0 Row (I) 500 200 are priced at 13% and 300 are priced at 14% per annum Row (J) 0 Row (K) 0 Row (L) 0 Row (M) 0 Row (N) 0 Row (O) 0 Total (A to O) 1000 Weighted average interest costs to be reported in items 1c and 1d are calculated as follows:
(i) for row (A)
(20 x 2% x 12 + 80 x 8%)  100 x 100% = 11.20% (ii) for row (B) (200 x 10% + 150 x 9%)  350 x 100% = 9.57% (iii) for row (C) (50 x 12%)  50 x 100% = 12.00% (iv) for row (I) (200 x 13%+ 300 x 14%) 500 x 100% = 13.60% (iv) for row Total (A to O) (20 x 2% x 12 + 80 x 8% + 200 x 10% + 150 x 9% + 50 x 12%

• 200 x 13%+ 300 x 14%) ÷1000 x 100% = 11.87%