Revised Return of Capital Adequacy Ratio (Form MA(BS)3) Enclosure 10: Completion Instructions - Part IIId (Securitization Exposures)

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Completion Instructions
Return of Capital Adequacy Ratio
Part IIId – Risk-weighted Amount for Credit Risk
(Securitization Exposures)
Form MA(BS)3(IIId)
Introduction

1. Form MA(BS)3(IIId) of Part III should be completed by each authorized
   institution incorporated in Hong Kong that has securitization exposures 1 booked in its banking book.
2. This Form contains the following Divisions:
   (a) Division A is a summary table showing the total risk-weighted amounts (“RWAs”) of the securitization exposures of a reporting institution (“reporting AI”) and the capital deduction required in respect of its securitization transactions or securitization exposures; (b) Division B captures securitization exposures (other than re-securitization exposures) that are subject to the securitization internal ratings-based approach (SEC-IRBA); (c) Division C1 captures securitization exposures (other than re-securitization exposures) that are subject to the securitization external ratings-based approach (SEC-ERBA) where the risk-weights are determined based on— (i) long-term ECAI issue specific ratings or long-term inferred ratings; or (ii) (if the reporting AI has an IAA approval to use the internal assessment approach (IAA)) internal credit ratings mapped to equivalent long-term ECAI issue specific ratings; (d) Division C2 captures securitization exposures (other than re-securitization exposures) that are subject to the SEC-ERBA where the risk-weights are determined based on— (i) short-term ECAI issue specific ratings or short-term inferred ratings; or

1
For example, asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivative contracts, tranched credit protection, and reserve accounts, such as cash collateral accounts, recorded as an asset by the originating institution.

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(ii) (if the reporting AI has an IAA approval to use the IAA) internal credit ratings mapped to equivalent short-term ECAI issue specific ratings; (e) Division D1 captures securitization exposures (other than re-securitization exposures) that are subject to the securitization standardized approach (SEC-SA); (f) Division D2 captures re-securitization exposures that are subject to the SEC-SA; and (g) Division E captures securitization exposures (including re-securitization exposures) that are subject to the securitization fall-back approach (SEC￾FBA).
3. In each of Divisions B, D1, D2 and E, columns (1) to (3) are for reporting of
on-balance sheet securitization exposures while columns (4) to (7) are for reporting of off-balance sheet securitization exposures. In Divisions C1 and C2, on-balance sheet securitization exposures and off-balance sheet securitization exposures should be reported in columns (1) to (3a) and columns (4) to (7a) respectively. Columns (3a) and (7a) are subsets of columns (3) and (7).
4. This Form and its completion instructions should be read in conjunction with
the Banking (Capital) Rules (“BCR”) and the relevant supervisory policy and guidance (in particular, the SPM module CR-G-12 “Credit Risk Transfer Activities” and the Q&As on the securitization framework). General Instructions A. Definitions of terms referred to in the Form
5. “Principal Amount” of an off-balance sheet exposure has the same meaning as
that given by paragraph (b) of the definition of principal amount in section 227(1) of the BCR. However, if the off-balance sheet exposure concerned is a default risk exposure arising from a derivative contract, “Principal Amount” means the notional amount of the contract.
6. “Exposure Amount before CRM”
(a) In Division B of the Form—means the exposure amount of a securitization exposure before taking into account any Part 7 credit risk mitigation (“Part 7 CRM”) obtained for the exposure, but net of any amounts that are permitted to be deducted from the exposure amount (e.g. specific provisions, write-offs and non-refundable purchase price discounts) under section 236(3) of the BCR; (b) In Divisions C1 to E of the Form— (i) if the securitization exposure is an on-balance sheet exposure, a default risk exposure or an exposure arising from the provision of unfunded credit protection—means the exposure amount of the

MA(BS)3(IIId)/P.3 (03/2019) exposure before taking into account any Part 7 CRM obtained for the exposure, but net of any amounts that are permitted to be deducted from the exposure amount (e.g. specific provisions, write￾offs and non-refundable purchase price discounts) under section 236(3) of the BCR; (ii) in any other case—means the amount obtained by multiplying the principal amount of the exposure (net of the amounts specified in
section 236(3) of the BCR, if any) by the factor applicable to the
exposure specified in section 235(2)(c) of the BCR;
7. “Senior exposures” means securitization exposures in senior tranches (See
Annex IIId-A for more information on the determination of seniority).
8. “Non-senior exposures” means securitization exposures in non-senior tranches.
9. “Senior long-term exposures” means senior exposures that have a long-term
ECAI issue specific rating or a long-term inferred rating.
10. “Non-senior long-term exposures” means non-senior exposures that have a
long-term ECAI issue specific rating or a long-term inferred rating.
11. “Senior short-term exposures” means senior exposures that have a short-term
ECAI issue specific rating or a short-term inferred rating.
12. “Non-senior short-term exposures” means non-senior exposures that have a
short-term ECAI issue specific rating or a short-term inferred rating.
13. “Risk-weight” means—
(a) in the case of a securitization exposure (other than a re-securitization exposure)—the risk-weight applicable to the exposure determined by using the SEC-IRBA, SEC-ERBA, SEC-SA or SEC-FBA— (i) after taking into account the risk-weight floor of 15% and, if applicable, the risk-weight cap for senior tranches (see sections 240 and 241 of the BCR); and (ii) without taking into account any Part 7 CRM. (b) in the case of a re-securitization exposure—the risk-weight applicable to the exposure determined by using the SEC-SA or SEC-FBA— (i) after taking into the risk-weight floor of 100% (see section 240 of the BCR); and (ii) without taking into account any Part 7 CRM; (c) in the case of Part 7 CRM obtained for a securitization exposure— the risk-weight applicable to—

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(i) the recognized collateral determined in accordance with Part 4, 6 or 7 and in compliance with Division 5 of Part 7 of the BCR; or (ii) the credit protection provider of the recognized guarantee or recognized credit derivative contract, as the case may be, determined in accordance with Part 4 or 6 and in compliance with Division 5 of Part 7 of the BCR. B. Reporting of underlying exposures of securitization transaction where reporting AI is originating institution
14. The AI must report the underlying exposures of a non-eligible securitization
transaction as follows—
(a) report the exposures in Form MA(BS)3(IIIa), Form MA(BS)3(IIIb) or Form MA(BS)3(IIIc) (if the exposures are non-securitization exposures) or this Form (if the exposures are securitization exposures), as if the exposures had not been securitized; and (b) if the transaction is a synthetic securitization transaction, the exposures must be reported without taking into account the effect of any credit risk mitigation (“CRM”) used for transferring the credit risk of the underlying exposures to other parties to the transaction.
15. If the transaction is an eligible securitization transaction and the AI has served
a notice to the HKMA for applying the treatments set out in section 230(3) of the BCR to the underlying exposures— (a) (in the case of a traditional securitization transaction) the AI is not required to report the underlying exposures in any of Form MA(BS)3(IIIa), Form MA(BS)3(IIIb), Form MA(BS)3(IIIc) and this Form; (b) (in the case of a synthetic securitization transaction) the AI must report the underlying exposures and the effect of the CRM used for transferring the credit risk of the exposures in Form MA(BS)3(IIIa), Form MA(BS)3(IIIb) or Form MA(BS)3(IIIc) (if the exposures are non￾securitization exposures) or this Form (if the exposures are securitization exposures).
C. Decomposition of exposures covered by tranched credit protection
16. Subject to paragraph 17, if a securitization exposure or non-securitization
exposure is covered by tranched credit protection (“protected exposure”), no matter whether the protection is provided or obtained by the reporting AI, the protected exposure must be decomposed2 into a protected sub-tranche and an unprotected sub-tranche. The sub-tranches resulted from decomposing a non￾securitization exposure must be treated as securitization exposures for the purposes of calculating their RWAs.

2 The sub-tranches resulted from the decomposition are not considered as re-securitization exposures for capital adequacy purposes.

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17. When decomposing an exposure for which the AI has obtained tranched credit
protection, the decomposition must take into account— (a) if there is a maturity mismatch—the adjustment to the value of the credit protection required under section 246 of the BCR; and (b) if the tranched credit protection is in the form of recognized collateral and the reporting AI uses the comprehensive approach or Formula 19 in Part 6 of the BCR to take into account the credit risk mitigation effect of the collateral—the adjustment to the value of the credit protection resulted from any applicable standard supervisory haircuts applied to the collateral. D. Reporting of derivative contracts entered into under securitization transactions
18. If a reporting AI’s securitization exposure is a default risk exposure arising
from a derivative contract and the risk-weight of the exposure is determined by using the SEC-IRBA, SEC-ERBA, SEC-SA or SEC-FBA, the default risk exposure must be reported in this Form. E. Reporting of eligible ABCP exposures risk-weighted by using the IAA
19. A reporting AI with an IAA approval to risk-weight eligible ABCP exposures
by using the IAA should include the eligible ABCP exposures in the amounts reported in columns (1) to (3) and (4) to (7) of Divisions C1 and C2, and the RWAs of the eligible ABCP exposures should also be reported separately in columns (3a) and (7a) of those Divisions. F. Treatment of default risk and dilution risk in respect of purchased receivables under SEC-IRBA
20. For cases where the default and dilution risks are not treated in an aggregated
manner, the reporting AI must determine in a prudent manner how the KIRB of the entire pool of the underlying exposures concerned should be calculated in order to adequately reflect the extent to which the AI is exposed to the two risks (see section 252(3) of the BCR). Reporting AIs may refer to Section B of
Annex 1 to the paper “Revisions to the securitisation framework” issued by the
Basel Committee on Banking Supervision in December 2014 (revised in July
2016) for guidance.
G. Tranche maturity of tranche in securitization transaction
21. To avoid doubt, if a reporting AI uses Formula 24 under section 248 of the BCR
to calculate the tranche maturity (MT) of a tranche for the purpose of reporting in this Form the RWA of a securitization exposure in the tranche as of a particular position date, the cash flows (CFt) used in the Formula should be those that are contractually payable under the tranche from the position date to the final maturity of the tranche.

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Specific Instructions
H. Reporting requirements for Division A
22. Column (1) is for reporting the total RWAs of all of a reporting AI’s
securitization exposures to securitization transactions and the capital deductions required in respect of securitization transactions. If the reporting AI is the originating institution of any of these securitization transactions, it should report the RWAs of its securitization exposures to, and the capital deductions in respect of, the transactions originated by it in Column (2) as a sub-set of the amounts reported in Column (1).
23. Items A5 (a) and (b) are to be filled in by reporting AIs that are originating
institutions. If a reporting AI, which is the originating institution of a securitization transaction (other than a re-securitization transaction), has, in accordance with section 242 of the BCR, taken the maximum capital charge calculated for the transaction under that section as the total capital charge of all the AI’s securitization exposures to the transaction, the AI— (a) must report the corresponding RWA (i.e. the maximum capital charge times 12.5) in either item A5 (a) or (b) based on the original approach used by the AI for risk-weighting the securitization exposures; and (b) must not adjust the RWAs of the securitization exposures reported in any of Divisions B to E to reconcile with the amount reported in items A5 (a) or (b) (in other words, the amounts reported in any of these Divisions must be based on risk-weights without considering the maximum capital charge).
I. Reporting requirements for Divisions B to E – Securitization Exposures not
covered by Part 7 CRM
24. Subject to paragraph 26, if a reporting AI has not obtained any Part 7 CRM for
any of its securitization exposure—
(a) the exposure amount before CRM of the exposure must be reported in column (1) or (5), as the case requires; (b) if the exposure is an off-balance sheet exposure, its principal amount must be reported in column (4); (c) the exposure amount after CRM of the exposure, which is the same amount as the exposure amount before CRM, must be reported in column (2) or (6), as the case requires; (d) the RWA of the exposure, which is the product of the amount reported in column (2) or (6) and the risk-weight of the exposure, must be reported in column (3) or (7) (and, if applicable, column (3a) or (7a) of Divisions C1 and C2), as the case requires; and (e) all the amounts above must be reported in the same row that corresponds to the risk-weight applicable to the exposure.

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25. The reporting arrangements in paragraph 24 also apply to cases where the
securitization exposure is a default risk exposure calculated by using the IMM(CCR) approach where the recognized collateral obtained by the reporting AI has already been included in the calculation of the default risk exposure under the IMM(CCR) approach.
26. Securitization exposures arising from credit protection provided by reporting AI
(a) If full or proportional credit protection is provided by the AI to securitization exposure (“protected exposure”)— (i) for the purpose of paragraphs 24(a) and 24(b), the AI must determine the amount to be reported in column (1) or the amounts to be reported in columns (4) and (5), as the case requires, as if it directly held that portion of the protected exposure on which it has provided the credit protection; and (ii) for the purpose of paragraph 24(e), the risk-weight applicable to the AI’s exposure is the risk-weight applicable to the protected exposure. (b) If tranched credit protection is provided by the AI to a securitization or non-securitization exposure— (i) for the purpose of paragraphs 24(a) and 24(b), the AI must report the amount of the protected sub-tranche in column (1) or in columns (4) and (5); and (ii) for the purpose of paragraph 24(e), the risk-weight applicable to the AI’s exposure is the risk-weight applicable to the protected sub￾tranche determined under section 249 of the BCR. J. Reporting requirements for Division B - Securitization Exposures covered by Full or Proportional Credit Protection
27. If Part 7 CRM is obtained by a reporting AI for any of its securitization
exposure and the exposure is risk-weighted by using the SEC-IRBA, the AI must report the exposure amount before CRM of the exposure in column (1) or (5), and, if the exposure is an off-balance sheet exposure, the principal amount of the exposure in column (4), and in the row corresponding to the risk-weight applicable to the securitization exposure.
28. If the Part 7 CRM is a recognized guarantee or a recognized credit derivative
contract, the AI must, after adjusting the value of the credit protection for any maturity mismatch in accordance with section 246 of the BCR— (a) report in the row corresponding to the risk-weight applicable to the securitization exposure and— (i) in column (2) or (6)—the uncovered portion of the exposure determined in accordance with the substitution framework under
Part 6 of the BCR; and

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(ii) in column (3) or (7)—the RWA of the uncovered portion; and (b) report in the row corresponding to the risk-weight applicable to the credit protection provider concerned and — (i) in column (2) or (6)—the covered portion of the exposure determined in accordance with the substitution framework; and (ii) in column (3) or (7)—the RWA of the covered portion.
29. If the Part 7 CRM is recognized collateral, the AI must report—
(a) the net credit exposure (after adjusting the value of the credit protection for any maturity mismatch in accordance with section 246 of the BCR) determined by using Formula 19 in Part 6 of the BCR in column (2) or (6); and (b) the RWA of the net credit exposure in column (3) or (7). All the amounts above must be reported in the same row corresponding to the risk-weight applicable to the securitization exposure. K. Reporting requirements for Divisions C1 to E - Securitization Exposures covered by Full or Proportional Credit Protection
30. If Part 7 CRM is obtained by a reporting AI for any of its securitization
exposure and the exposure is risk-weighted by using the SEC-ERBA, SEC-SA or SEC-FBA, the AI must report the exposure amount before CRM of the exposure in column (1) or (5), and, if the exposure is an off-balance sheet exposure, the principal amount of the exposure in column (4), and in the row corresponding to the risk-weight applicable to the exposure.
31. Reporting arrangements applicable to recognized collateral subject to the simple
approach, recognized guarantees, recognized credit derivative contracts (a) If the securitization exposure is an on-balance sheet exposure, a default risk exposure or an exposure arising from the provision of unfunded credit protection, the AI must, after adjusting the value of the credit protection for any maturity mismatch in accordance with section 246 of the BCR— (i) report the credit protection uncovered portion of the exposure in column (2) or (6) and in the row corresponding to the risk-weight applicable to the securitization exposure; (ii) report the credit protection covered portion of the exposure in column (2) or (6) and in the row corresponding to the risk-weight applicable to the credit protection provider or the collateral concerned; and (iii) report—

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 the RWA of the credit protection uncovered portion in column (3) or (7) (and, if applicable, column (3a) or (7a) of Divisions C1 and C2) and in the row corresponding to the risk-weight applicable to the securitization exposure; and  the RWA of the credit protection covered portion in column (3) or (7) and in the row corresponding to the risk-weight applicable to the credit protection provider or collateral concerned. (b) If the securitization exposure is an off-balance sheet exposure other than one that is captured in paragraph (a), the same reporting arrangements in paragraph (a) apply except that— (i) the references to “credit protection uncovered portion” in paragraphs (a)(i) and (a)(iii) must be construed to mean the product of the credit protection uncovered portion of the exposure and the factor applicable to the exposure specified in section 235(2)(c); and (ii) the references to “credit protection covered portion” in paragraphs (a)(ii) and (a)(iii) must be construed to mean the product of the credit protection covered portion of the exposure and the factor applicable to the exposure specified in section 235(2)(c).
32. Reporting arrangements applicable to recognized collateral subject to the
comprehensive approach
(a) The net credit exposure (after adjusting the value of the credit protection for any maturity mismatch in accordance with section 246 of the BCR) calculated under section 87, 88 or 89 of the BCR, as the case requires, must be reported in column (2) or (6); and (b) the RWA of the net credit exposure must be reported in column (3) or (7) (and, if applicable, column (3a) or (7a) of Divisions C1 and C2). All the amounts above must be reported in the same row corresponding to the risk-weight applicable to the securitization exposure.
L. Reporting requirements for Divisions B to E - Securitization Exposure or
Non-securitization Exposure covered by Tranched Credit Protection
33. If the tranched credit protection is obtained by a reporting AI for a securitization
exposure or non-securitization exposure, the AI must report— (a) the amounts of the unprotected sub-tranche and protected sub-tranche in column (1) or in columns (4) and (5), and in the rows corresponding to the risk-weights applicable to the sub-tranches (i.e. the risk-weights determined in accordance with section 249 of the BCR); (b) the amount of the unprotected sub-tranche in column (2) or (6) and in the row corresponding to the risk-weight applicable to the unprotected sub￾tranche;

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(c) the amount of the protected sub-tranche in column (2) or (6) and in the row corresponding to the risk-weight applicable to the collateral or the credit protection provider concerned, as the case may be; (d) the RWA of the unprotected sub-tranche in column (3) or (7) (and, if applicable, column (3a) or (7a) of Divisions C1 and C2) and in the row corresponding to the risk-weight applicable to the unprotected sub-tranche; and (e) the RWA of the protected sub-tranche in column (3) or (7) and in the row corresponding to the risk-weight applicable to the collateral (if the simple approach is used) or credit protection provider. M. Reporting of overlapping securitization exposures
34. If there is an overlapping portion in a reporting AI’s securitization exposures to
a securitization transaction and the overlapping is between securitization exposures booked in the banking book and the trading book of the AI, the overlapping portion that is attributed to the exposures booked in the banking book must be reported in this Form. However, if the overlapping portion is attributed to the exposures booked in the trading book, the overlapping portion must be reported in Form MA(BS)3(IV) (see Annex IIId-B for illustration). Hong Kong Monetary Authority March 2019

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Annex IIId-A
Guidance on determining the seniority of tranches

1. If several senior tranches in the same securitization transaction have different
   maturities and the tranches share pro rata loss allocation, the different maturities shall have no effect on the seniority of these tranches since they benefit from the same level of credit enhancement.
2. In a typical synthetic securitization transaction, a tranche that does not have an
   ECAI issue specific rating (“relevant tranche”) would be treated as a senior tranche, provided that an inferred rating can be attributed to the relevant tranche by reference to a rated lower tranche that is a senior tranche.
3. In a traditional securitization transaction where all tranches above the first loss
   tranche are rated, the most highly rated position would be treated as a senior tranche. If there are several tranches that share the same rating, only the tranche that is eligible for the highest priority of payment or repayment will be treated as a senior tranche. If there are several senior tranches having different ratings and the different ratings only result from a difference in maturity, all of these tranches should be treated as a senior tranche.
4. A liquidity facility supporting an ABCP programme may be treated as a senior
   tranche if—
   (a) the facility is sized to cover all of the outstanding commercial papers and other senior debts supported by the pool of underlying exposures concerned; and (b) no cash flows from the pool of underlying exposures can be transferred to creditors (other than the person providing the facility) until the drawn portion of the liquidity facility is repaid in full.
5. If a liquidity facility supporting an ABCP programme does not meet the
   conditions in paragraphs 4(a) and 4(b), or if for other reasons the facility constitutes a mezzanine position in economic substance rather than a senior position in the pool of underlying exposures concerned, the facility should be treated as a non-senior tranche.

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Annex IIId-B
Treatment of Overlapping Securitization Exposures

1. A reporting AI may determine the amount of the overlapping portion using any
   of the two different approaches described below.
2. The first approach is to split its securitization exposures to a securitization
   transaction into—
   (a) portions that overlap with another securitization exposure held by it to the same transaction; and (b) other portions that do not overlap with each other.
3. The second approach is to expand its securitization exposures to a securitization
   transaction by assuming for capital adequacy purposes that the institution’s obligations with respect to one of the securitization exposures are larger than those established contractually. This could be done, say, by expanding the trigger events to exercise a facility and/or the extent of the institution’s obligations under the facility. For example, if a liquidity facility provided by an authorized institution to an ABCP programme is not contractually required to cover defaulted assets or will not fund the programme under certain circumstances, the institution may regard the facility overlaps with the commercial papers (“CPs”) issued by the ABCP conduit held by the institution as if— (a) its obligations under the facility covered the defaulted assets; or (b) the circumstances concerned were trigger events which, if occur, will allow the facility to be drawn, such that the facility would preclude all losses on the CPs. In this case, the institution is not required to hold regulatory capital for the CPs. However, the regulatory capital it must hold against the facility must be calculated based on the obligations as expanded in the manner described in paragraph (a) and (b) instead of those established contractually. Illustrative Examples of the First Approach
4. An originating institution of an ABCP programme provides a liquidity facility
   of $10 million to the programme. The institution also holds $2 million of the CPs (rating: A-2) issued under the programme. The overlapping portion of these two exposures is $2 million and the liquidity facility has a higher seniority than the CPs. Other details are as follows:

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(a) the risk-weight of the liquidity facility (RW facility) is 15%; (b) the CCF applicable to the liquidity facility is 100%; (c) the risk-weight of the CPs is 50% (RW credit); (d) the market risk capital charge factor for specific risk of the CPs under the STM approach is 4% which is equivalent to a risk-weight of 50% (RW market). Liquidity facility $10 mio – higher repayment priority CPs held $2 mio – lower repayment priority A. Overlapping within Banking Book (i.e. liquidity facility overlaps with CPs that are held in the banking book)
5. Since the liquidity facility has a higher seniority, fulfilling the AI’s obligations
with respect to the CPs by absorbing credit losses on the underlying exposures first will preclude a loss from the facility, the overlapping portion is attributed to the CPs. (a) The RWA of the overlapping portion:
= 2 million  RW credit
= 2 million  50%
= 1 million --- (1)
(b) The RWA of the portion of the liquidity facility that is not the overlapping portion:
= (10 million – 2 million)  CCF  RW liquidity = 8 million  100%  15% = 1.2 million --- (2)
6. The total RWA of the institution’s securitization exposures to the programme:
= (1) + (2)
= 1 million + 1.2 million

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= 2.2 million
B. Overlapping between Banking Book and Trading Book (i.e. liquidity facility overlaps with CPs that are held in the trading book)
7. If the overlapping portion is attributed to the liquidity facility, RWA of the
overlapping portion
= 2 million  CCF  RW liquidity
= 2 million  100%  15%
= 0.3 million
8. If the overlapping portion is attributed to the CPs, the RWA of the overlapping
portion
= 2 million  RW market
= 2 million  50 %
= 1 million
9. The overlapping portion is attributed to the CPs as this results in a higher RWA.
Hence, the RWA of 1 million must be reported in Form MA(BS)3(IV).
10. The RWA of the portion of the liquidity facility that is not the overlapping
portion
= (10 million - 2 million)  CCF  RW liquidity = 8 million  100%  15% = 1.2 million (To be reported in this Form)