1
Annex IIIa and IIIb-A
Examples of calculation of default risk exposure under the SA-CCR approach  The counterparty of the derivative contracts in each of the cases below is an unrated corporate and the AI concerned has not made use of any recognized guarantee or recognized credit derivative contract to mitigate the default risk exposure to the corporate arising from these contracts. Case 1: Unmargined contracts not covered by recognized netting In this case, since the derivative contracts entered into by the AI with the corporate are not covered by recognized netting, each contract forms a single netting set. Also, neither the AI nor the counterparty has posted collateral for the contracts. Netting set A Contract Type of contract Base currency Notional (HK$’000) Residual maturity (in year) Pay Receive Market value (HK$’000) A1 Interest rate swap HKD 10,000 0.25 Fixed Floating 10 Netting set B Contract Type of contract Base currency Notional (HK$’000) Residual maturity (in year) Pay Receive Market value (HK$’000) A2 Interest rate swap HKD 10,000 5 Floating Fixed -25 Netting set C Contract Type of contract Base currency Notional (HK$’000) Residual maturity (in year) Reference entity ECAI issuer rating of reference entity Position of the AI Market value (HK$’000) A3 Credit default swap HKD 10,000 2 Firm X BBB Protection seller 50

2
I. Calculation of default risk exposure
Step 1: Calculation of replacement cost (RC) at the level of netting set 𝑅𝐶 = 𝑚𝑎𝑥 (𝑉 − 𝐶; 0) 𝑅𝐶𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐴 = max(10 − 0; 0) = 10 𝑅𝐶𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐵 = max(−25 − 0; 0) = 0 𝑅𝐶𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐶 = max(50 − 0; 0) = 50 Step 2: Calculation of add-on at the level of netting set Step 2.1: Calculation of contract-level adjusted notional amount (di) Contract Hedging Set Si Ei Notional amount (HK$’000) (a) Supervisory duration (SDi) (b) Adjusted notional amount (di) (HK$’000) = (a) × (b) A1 HKD 0 0.25 10,000 0.248 2,484 A2 HKD 0 5 10,000 4.424 44,240 A3 NA 0 2 10,000 1.903 19,033 The supervisory duration of contract i, which is subject to a floor of 10 business days, is calculated as follows:
𝑆𝐷𝑖 =
𝑒𝑥𝑝(−0.05 ∗ 𝑆𝑖
) − 𝑒𝑥𝑝(−0.05 ∗ 𝐸𝑖)
0.05
𝑆𝐷𝐴1 =
𝑒𝑥𝑝(−0.05∗0)−𝑒𝑥𝑝(−0.05∗0.25)
0.05
= 0.248
𝑆𝐷𝐴2 =
𝑒𝑥𝑝(−0.05∗0)−𝑒𝑥𝑝(−0.05∗5)
0.05
= 4.424
𝑆𝐷𝐴3 =
𝑒𝑥𝑝(−0.05∗0)−𝑒𝑥𝑝(−0.05∗2)
0.05
= 1.903

3
Step 2.2: Calculation of effective notional amount (Di) at the level of hedging set For unmargined contract i not subject to recognized netting, the effective notional amount of a hedging set is equivalent to the effective notional amount of contract i and is given by the following formula:
𝐷𝑖 = 𝛿𝑖 ∗ 𝑑𝑖 ∗ 𝑀𝐹𝑖
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) where 𝑀𝐹𝑖
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) is the maturity factor applicable to contract i given by the following formula (Mi is subject to a floor of 10 business days):
𝑀𝐹𝑖
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √
𝑚𝑖𝑛{𝑀𝑖
; 1 𝑦𝑒𝑎𝑟}
1 𝑦𝑒𝑎𝑟
𝑀𝐹𝐴1
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √
𝑚𝑖𝑛{0.25; 1}
1
= 0.5
𝑀𝐹𝐴2
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √
𝑚𝑖𝑛{5; 1}
1
= 1
𝑀𝐹𝐴3
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √
𝑚𝑖𝑛{2; 1}
1
= 1
Contract Residual maturity
(Mi)
Supervisory delta (δi)
(a)
Adjusted notional amount (di)
(HK$’000)
(b)
Maturity factor (MFi)
(c)
Effective notional amount (Di)
(HK$’000)
= (a) × (b) × (c)
A1 0.25 +1 2,484 0.5 1,242
A2 5 -1 44,240 1 -44,240
A3 2 -1 19,033 1 -19,033

4
Step 2.3: Calculation of add-on at the level of netting set For an interest rate1 or credit-related2 derivative contract not covered by recognized netting, the add-on for the netting set concerned is calculated as follows:
𝐴𝑑𝑑𝑂𝑛 = 𝑆𝐹 ∗ |𝐷𝑖
|
Netting set Contract Absolute value of effective notional amount (|𝑫𝒊 |) (HK$’000) (a) Supervisory factor (SF) (b) Add-on (HK$’000) = (a) × (b) A A1 1,242 0.5% 6.21 B A2 44,240 0.5% 221.20 C A3 19,033 0.54% 102.78 Step 3: Calculation of potential future exposure (PFE) and default risk exposure at the level of netting set 𝑃𝐹𝐸 = 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 ∗ 𝐴𝑑𝑑𝑂𝑛 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑖𝑠𝑘 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 = 𝑎𝑙𝑝ℎ𝑎 ∗ (𝑅𝐶 + 𝑃𝐹𝐸 )

1
For a netting set that contains only one contract, if the contract is an interest rate contract, Formulas 23AS and 23AT in §226BU(2) of the BCR should result in the same effective notional amount for the contract. That is- 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙(𝐼𝑅) = |𝐷 (𝑀𝐵) | where D (MB) is the effective notional amount for the maturity bucket in which the contract falls. However, since there is only one maturity bucket in the netting set, the actual calculation does not require allocation of the contract into a maturity bucket. 2 For a netting set that contains only one contract, if the contract is a credit-related derivative contract, Formula 23AQ in §226BT(3) of the BCR will be reduced to – 𝐴𝑑𝑑𝑂𝑛(𝑐𝑟𝑒𝑑𝑖𝑡) = [𝐴𝑑𝑑𝑂𝑛(𝐸𝑛𝑡𝑖𝑡𝑦𝑘 ) 2 ]
0.5 = 𝐴𝑑𝑑𝑂𝑛(𝐸𝑛𝑡𝑖𝑡𝑦𝑘
) = 𝑆𝐹𝑘
(𝐶𝑟𝑒𝑑𝑖𝑡)
∗ 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙𝑘
(𝐶𝑟𝑒𝑑𝑖𝑡)

5
Netting set
RC
(HK$’000)
(a)
Multiplier
(b)
Add-on
(HK$’000)
(c)
PFE
(HK$’000)
(d) = (b) × (c)
Default risk exposure
(HK$’000)
=1.4*((a) + (d))
A 10 1 6.21 6.21 22.69
B 0 0.945 221.20 209.03 292.65
C 50 1 102.78 102.78 213.89
Total 529.23
The multiplier applied to each of the above netting sets is calculated as follows:
𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = min {1; 𝐹𝑙𝑜𝑜𝑟 + (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝑒𝑥𝑝 ( 𝑉 − 𝐶 2 ∗ (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝐴𝑑𝑑𝑂𝑛)} For both netting sets A and C, since the current market value of the netting set is positive and no net collateral is held by the AI, the multiplier is equal to 1. For netting set B− 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐵 = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( −25 2∗(1−5%)∗221.2 )} = 0.945

6
II. Reporting arrangement
Division A - RWA a. Part IIIa b. Part IIIb

7
Division B – Default risk exposure amount a. Part IIIa Division B - III b. Part IIIb Division B - II

8
Case 2: Margined contracts not covered by recognized netting In this case, the netting sets include netting sets A and B in Case 1 and the following netting sets:
Netting set D
Contract Type of contract Entity Number of units referenced by the contract Strike (HK$) Residual maturity (in year) Current price of underlying (HK$) Market value (HK$’000) A4 Bought equity call option (European style) Firm B 1,000 245 0.25 234 11 Netting set E Contract Type of contract Notional (US$’000) Contract rate Residual maturity (in year) Market value (HK$’000) A5 Long FX forward (USD/CNH) 1,000 6.6248 0.4 16 The four netting sets are subject to the same margin agreement with the following details:
(in HK$’000)
Margining frequency
Threshold Min. Transfer
Amount
Independent
Amount
Haircut value of net collateral held by the AI daily 0 5 450 500
I. Calculation of default risk exposure
Step 1: Calculation of replacement cost (RC) of netting sets covered by margin agreement MA 𝑅𝐶𝑀𝐴 = 𝑚𝑎𝑥 { ∑ 𝑚𝑎𝑥{𝑉𝑁𝑆; 0} − 𝑚𝑎𝑥{𝐶𝑀𝐴; 0}; 0 𝑁𝑆∈𝑀𝐴 }

• 𝑚𝑎𝑥 { ∑ 𝑚𝑖𝑛{𝑉𝑁𝑆; 0} − 𝑚𝑖𝑛{𝐶𝑀𝐴; 0}; 0
  𝑁𝑆∈𝑀𝐴
  }

9
Contract max{VNS; 0} min{VNS; 0}
A1 10 0
A2 0 -25
A4 11 0
A5 16 0
Total 37 -25
= max{37 − max{500; 0}; 0} + max{−25 − min{500; 0}; 0} = max (37 - 500; 0) + max (-25; 0) = 0 Step 2: Calculation of add-on at the level of netting set Step 2.1: Calculation of contract-level adjusted notional amount (di) Contract Hedging Set USD leg (HK$’000) CNH leg (HK$’000) Number of units referenced by the contract Current price of one unit of the underlying assets (HK$) Adjusted notional amount (di) (HK$’000) A4 Firm B NA NA 1,000 234 234 A5 USD/CNH 7,774 7,881 NA NA 7,881 Step 2.2: Calculation of effective notional amount (Di) at the level of hedging set Contract Residual maturity (Mi) Supervisory delta (δi) (a) Adjusted notional amount (di) (HK$’000) (b) Maturity factor (MFi) (c) Effective notional amount (Di) (HK$’000) = (a) × (b) × (c) A4 0.25 +0.588 234 0.5000 69 A5 0.40 +1 7,881 0.6325 4,984 The supervisory delta adjustment of Contract A4 is calculated in accordance with §226BZB(2) and (3) of the BCR. Spot price of the underlying equity is used in the calculation for illustrative purposes.

10
𝛿𝐴4 = +𝑁 (
𝐼𝑛 (
𝑃
𝐾
) + 0.5 ∙ 𝜎
2
∙ 𝑇
𝜎 ∙ √𝑇
)
𝛿𝐴4 = +𝑁 (
𝐼𝑛 (
234
245) + 0.5 ∙ 120%2
∙ 0.25
120% ∙ √0.25 )
= +0.588
As there are multiple netting sets covered by the same variation margin agreement, the potential future exposure of each of Contract A4 and Contract A5 must be calculated in a manner as if the contracts were unmargined contracts (see §226BS of the BCR). Accordingly, the maturity factor of each of the contracts is calculated by using the formula for unmargined contracts. 𝑀𝐹𝑖 (𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √ 𝑚𝑖𝑛{𝑀𝑖 ; 1 𝑦𝑒𝑎𝑟} 1 𝑦𝑒𝑎𝑟 𝑀𝐹𝐴4 (𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √ 𝑚𝑖𝑛{0.25; 1} 1 = 0.5 𝑀𝐹𝐴5 (𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑) = √ 𝑚𝑖𝑛{0.4; 1} 1 = 0.6325 Step 2.3: Calculation of add-on at the level of netting set Contract Effective notional amount (Di) (HK$’000) (a) Supervisory factor (SF) (b) Add-on3 (HK$’000) = (a) × (b) A4 69 32% 22.03 A5 4,984 4% 199.36

3
See footnote 2 above.

11
Step 3: Calculation of potential future exposure (PFE) of netting sets covered by margin agreement MA Step 3.1: Calculation of multiplier of each netting set As the same collateral is shared by four netting sets and the AI in this example is a net receiver of collateral (C>0), netting sets with positive market values must first be allocated collateral up to the amount of those market values. Only after all positive market values have been compensated may surplus collateral be attributed freely among all netting sets. Also, the allocated parts must add up to the total collateral available for the margin agreement. Apart from these limitations, AIs may allocate available collateral at their discretion. The following
table shows the multipliers calculated by using one of the possible collateral allocations.
Netting set Market value
(HK$’000)
Collateral allocated*
(HK$’000)
Multiplier
A 10 22.65 0.375
B -25 0 0.945
D 11 55.90 0.375
E 16 421.44 0.376
*The allocation is for illustrative purpose only and does not represent any preference of the HKMA. From Case 1, the multiplier of netting set B is 0.945. The multipliers of other netting sets are calculated as follows:
𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐴 = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( 10−22.65 2∗(1−5%)∗6.21)} = 0.375 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐷 = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( 11−55.90 2∗(1−5%)∗22.03)} = 0.375 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟𝑛𝑒𝑡𝑡𝑖𝑛𝑔 𝑠𝑒𝑡 𝐸 = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( 16−421.44 2∗(1−5%)∗199.36)} = 0.376 Step 3.2: Calculation of PFE of each netting set on unmargined basis Netting set AddOn (HK$’000) (a) Multiplier (b) PFE (unmargined) (HK$’000) = (a)×(b) A 6.21 0.375 2.33

12
Netting set AddOn
(HK$’000)
(a)
Multiplier
(b)
PFE (unmargined)
(HK$’000)
= (a)×(b)
B 221.20 0.945 209.06
D 22.03 0.375 8.26
E 199.36 0.376 74.91
Total 294.56
𝑃𝐹𝐸𝑀𝐴 = ∑ 𝑃𝐹𝐸𝑁𝑆
(𝑢𝑛𝑚𝑎𝑟𝑔𝑖𝑛𝑒𝑑)
𝑁𝑆∈𝑀𝐴
= 294.56
Step 4: Calculation of default risk exposure of netting sets covered by margin agreement MA 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑟𝑖𝑠𝑘 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑀𝐴 = 𝑎𝑙𝑝ℎ𝑎 ∗ (𝑅𝐶𝑀𝐴 + 𝑃𝐹𝐸𝑀𝐴) = 1.4 ∗ (0 + 294.56) = 412
II. Reporting arrangement
Division A - RWA a. Part IIIa

13 b. Part IIIb
Division B – Default risk exposure amount In this example, the stated notional amount of the FX forward contract is USD1,000. The notional amount reported in the CAR return is the HKD equivalent of USD1,000, instead of the adjusted notional amount of the contract. a. Part IIIa Division B – III

14 b. Part IIIb Division B - II

15
Case 3: Unmargined contracts covered by recognized netting In this case, the contracts involved are the same as contracts A1, A2 and A3 in Case 1, except that the three contracts are covered by recognized netting and therefore fall within the same netting set. Also, neither the AI nor the counterparty has posted collateral for the contracts.
I. Calculation of default risk exposure
Step 1: Calculation of replacement cost (RC) at the level of netting set 𝑅𝐶 = 𝑚𝑎𝑥 (𝑉 − 𝐶; 0) = 𝑚𝑎𝑥 (10 − 25 + 50; 0) = 35 Step 2: Calculation of add-on at the level of netting set Step 2.1: Calculation of effective notional amount (Di) at the level of hedging set From Case 1, we have the following information on each of the derivative contracts:
Contract Maturity bucket
Residual maturity
(Mi)
Supervisory delta (δi)
(a)
Adjusted notional amount (di)
(HK$’000)
(b)
Maturity factor (MFi)
(c)
Effective notional amount (Di)
(HK$’000)
= (a) × (b) × (c)
A1 1 0.25 +1 2,484 0.5 1,242
A2 2 5 -1 44,240 1 -44,240
A3 NA 2 -1 19,033 1 -19,033
The effective notional amount of the hedging set that contains contracts A1 and A2 is calculated by using Formula 23AS in §226BU(2) of the BCR as follows:
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙ℎ𝑒𝑑𝑔𝑖𝑛𝑔 𝑠𝑒𝑡 = [(𝐷𝐴1 ) 2 + (𝐷𝐴2 ) 2 + 1.4 ∙ 𝐷𝐴1 ∙ 𝐷𝐴2 ] 0.5 = [(1,242) 2 + (−44,240) 2 + 1.4 ∗ (1,242) ∗ (−44,240)]
0.5 = 43,379.67

16
Step 2.2: Calculation of add-on at the level of asset class Given the effective notional amounts calculated under Step 2.1, the add-on for each asset class is calculated as follows:
Asset class Effective notional amount
(HK$’000)
(a)
Supervisory factor
(b)
Add-on4
(HK$’000)
= (a) × (b)
Interest rate contracts 43,380 0.5% 216.90 Credit-related derivative contracts 19,033 0.54% 102.78 Step 2.3: Calculation of add-on at the level of netting set 𝐴𝑑𝑑𝑂𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) = 𝐴𝑑𝑑𝑂𝑛(𝐼𝑅) + 𝐴𝑑𝑑𝑂𝑛(𝐶𝑟𝑒𝑑𝑖𝑡) = 216.90 + 102.78 = 319.68 Step 3: Calculation of potential future exposure at the level of netting set 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = min {1; 𝐹𝑙𝑜𝑜𝑟 + (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝑒𝑥𝑝 ( 𝑉 − 𝐶 2 ∗ (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝐴𝑑𝑑𝑂𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) )} = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( (10 − 25 + 50) − 0 2 ∗ (1 − 5%) ∗ 319.68)} = 1 𝑃𝐹𝐸 = 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 ∗ 𝐴𝑑𝑑𝑜𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) = 1 ∗ (319.68) = 319.68 Step 4: Calculation of default risk exposure of the netting set 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑖𝑠𝑘 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 = 𝑎𝑙𝑝ℎ𝑎 ∗ (𝑅𝐶 + 𝑃𝐹𝐸) = 1.4 ∗ (35 + 319.68) = 496.55

4 Also see footnote 2.

17
II. Reporting arrangement
Division A - RWA a. Part IIIa b. Part IIIb

18
Division B – Default risk exposure amount a. Part IIIa Division B – III b. Part IIIb Division B - II

19
Case 4: Margined contracts covered by recognized netting In this case, the contracts involved are the same as Case 2 and subject to the same margin agreement as described in Case 2, except that the contracts are covered by the same valid bilateral netting agreement and therefore fall within the same netting set.
I. Calculation of default risk exposure
Step 1: Calculation of replacement cost (RC) at the level of netting set RC = max (V – C ; TH + MTA – 𝑁𝐼𝐶𝐴; 0) 𝑉 = 10 − 25 + 11 + 16 = 12 RC = max (12 – 500 ; 0 + 5 – 450; 0) = 0 Step 2: Calculation of add-on at the level of netting set Step 2.1: Calculation of contract-level effective notional amount (Di) From Cases 1 and 2, we have the following information on each of the derivative contracts:
Contract Maturity bucket
Supervisory delta (δi)
(a)
Adjusted notional amount (di)
(HK$’000)
(b)
Maturity factor (MFi)
(c)
Effective notional amount (Di)
(HK$’000)
= (a) × (b) × (c)
A1 1 +1 2,484 0.3 745.33
A2 2 -1 44,240 0.3 -13,271.95
A4 NA +0.588 234 0.3 41.31
A5 NA +1 7,881 0.3 2,364.17
The maturity factor for margined transactions depends on the margin period of risk (MPOR). For daily re-margining, the MPOR is at least 10 business days. In this example, the contracts are not centrally cleared and the requirements in §226BZE(3), (4) and (6) do not apply to the contracts. Hence, the maturity factor for the contracts in the netting set is as follows (the convention of 250 business days in a year is used):

20
MFi
(margined)

3
2
√
MPORi
1 year = 1.5 ∗ √
10
250 = 0.3
Step 2.2: Calculation of effective notional amount (Di) at the level of hedging set Contracts A1 and A2 are in the same hedging set but in different maturity buckets. The effective notional amount of the hedging set is calculated by using Formula 23AS in §226BU(2) of the BCR as follows:
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 = [(𝐷𝐴1 ) 2 + (𝐷𝐴2 ) 2 + 1.4 ∙ 𝐷𝐴1 ∙ 𝐷𝐴2 ] 0.5 = [(745.33) 2 + (−13,271.95) 2 + 1.4 ∗ (745.33) ∗ (−13,271.95)]
0.5 = 12,761.33
In the case of Contracts A4 and A5, each contract forms its own hedging set. Hence, the effective notional amount of each hedging set is same as the contract-level effective notional amount. Step 2.3: Calculation of add-on at the level of asset class Given the effective notional amounts calculated under Step 2.2, the add-on for each asset class is calculated as follows:
Asset class Effective notional amount
(HK$’000)
(a)
Supervisory factor
(b)
Add-on5
(HK$’000)
= (a) × (b)
Interest rate contract 12,761.33 0.5% 63.81 Equity-related derivative contract 41.31 32% 13.22 Exchange rate contract 2,364.17 4% 94.57 Step 2.4: Calculation of add-on at the level of netting set 𝐴𝑑𝑑𝑂𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) = 𝐴𝑑𝑑𝑂𝑛(𝐼𝑅) + 𝐴𝑑𝑑𝑂𝑛(E𝑞𝑢𝑖𝑡𝑦) + 𝐴𝑑𝑑𝑂𝑛(𝐹𝑋) = 63.81 + 13.22 + 94.57 = 171.59

5 See footnote 2, which also applies in the case of equity-related derivative contracts.

21
Step 3: Calculation of potential future exposure at the level of netting set 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = min {1; 𝐹𝑙𝑜𝑜𝑟 + (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝑒𝑥𝑝 ( 𝑉 − 𝐶 2 ∗ (1 − 𝐹𝑙𝑜𝑜𝑟) ∗ 𝐴𝑑𝑑𝑂𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) )} = min {1; 5% + (1 − 5%) ∗ 𝑒𝑥𝑝 ( 12 − 500 2 ∗ (1 − 5%) ∗ 171.59)} = 0.2627 𝑃𝐹𝐸 = 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 ∗ 𝐴𝑑𝑑𝑜𝑛(𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒) = 0.2627 ∗ (171.59) = 45.07 Step 4: Calculation of default risk exposure of the netting set 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑖𝑠𝑘 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 = 𝑎𝑙𝑝ℎ𝑎 ∗ (𝑅𝐶 + 𝑃𝐹𝐸) = 1.4 ∗ (0 + 45.07) = 63
II. Reporting arrangement
Division A - RWA a. Part IIIa

22 b. Part IIIb
Division B – Default risk exposure amount a. Part IIIa Division B – III b. Part IIIb Division B – II