Supervisory Policy Manual module LM-1 on Regulatory Framework for Supervision of Liquidity Risk, Return of Liquidity Position of an Authorized Institution, and Return of Stable Funding Position of an Authorized Institution

Banking Policy Department
Our Ref: B1/15C
S4/16C
S5/1C
31 December 2019
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Supervisory Policy Manual module LM-1 on Regulatory Framework for Supervision of Liquidity Risk, Return of Liquidity Position of an Authorized Institution, and Return of Stable Funding Position of an Authorized Institution I am writing to inform you that, after consultation with the two industry associations, we have revised SPM module LM-1 on Regulatory Framework for Supervision of Liquidity Risk (“LM-1”) and two returns for reporting the statutory liquidity ratios. The main purposes of these revisions are to update our regulatory requirements consequential to the commencement of the Banking (Liquidity) (Amendment) Rules 2019 1 and incorporate certain provisions to keep pace with the latest development. In particular, the major changes to LM-1 are to:
(i) provide specific guidance for authorized institutions (“AIs”) in recognising Basel-compliant listed ordinary shares and triple-B rated marketable debt securities as “level 2B assets” and “liquefiable assets” under the Liquidity Coverage Ratio (“LCR”) and the Liquidity Maintenance Ratio (“LMR”) respectively; (ii) provide an overview of the statutory liquidity requirements in respect of the Net Stable Funding Ratio (“NSFR”) and the Core Funding Ratio (“CFR”) and explain the approach and criteria adopted by the Monetary Authority for the designation of category 2A institutions which are subject to the CFR requirements; and

1 https://www.legco.gov.hk/yr18-19/english/subleg/negative/2019ln084-e.pdf

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(iii) streamline the guidance on the disclosure of liquidity information by AIs. The main changes to the two returns are to:
(i) include Basel-compliant listed ordinary shares and triple-B rated marketable debt securities as “level 2B assets” and “liquefiable assets” in the calculation of LCR and LMR respectively; and (ii) implement a required funding requirement on total derivative liabilities in the calculation of NSFR and CFR. The revised version of LM-1 and the two liquidity-related returns (including templates and completion instructions) are enclosed with this letter. The returns will take effect from 1 January 2020 and the updated electronic files will be available from the HKMA’s supervisory communication website (http://www.stet.iclnet.hk) after reporting of December 2019 position under the respective returns is completed. If you have any questions about this circular, please feel free to contact Eve Law (2878-1197), Olivia Chung (2878-1624) or Willy Mak (2878-1219). Yours faithfully, Alice Lee Acting Executive Director (Banking Policy) Enclosures cc: The Chairperson, The Hong Kong Association of Banks The Chairperson, The DTC Association FSTB (Attn: Ms Eureka Cheung)

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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 provide guidance to AIs on the application of the Banking (Liquidity) Rules Classification A statutory guideline issued by the Monetary Authority under the Banking Ordinance, §7(3) Previous guidelines superseded LM-1 “Regulatory Framework for Supervision of Liquidity Risk” (V.2) dated 29.7.16 Guideline 6.2.1 “Treatment of revolving loans in the statutory liquidity ratio” dated 27 May 1994 Application To all AIs Structure

1. Introduction
2. Approach to supervising liquidity risk
3. Statutory liquidity requirements
   3.1 Liquidity Coverage Ratio (LCR)
   3.2 Liquidity Maintenance Ratio (LMR)
   3.2A Net Stable Funding Ratio (NSFR)
   3.2B Core Funding Ratio (CFR)

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3.3 Implementation of statutory liquidity ratios on Hong Kong
office basis, unconsolidated basis and consolidated basis
3.4 Notification of liquidity events and supervisory responses
3.5 Internal targets and limits
4. Designation of category 1 institutions and category 2A institutions
4.1 General
4.2 Designation of category 1 institutions
4.3 Revocation of designation
4.4 Application for designation (or revocation of designation)
4.5 Ongoing review of designation
4.6 Designation of category 2A institutions
5. Application of LCR
5.1 Structure of LCR
5.2 High quality liquid assets (HQLA)
5.3 Level 1 assets
5.4 Level 2A assets
5.5 Level 2B assets
5.6 Ceilings on level 2 assets
5.7 Alternative Liquidity Approach (ALA)
5.8 Total net cash outflows
5.9 Monetization of HQLA under financial stress
6. Application of LMR
6.1 Structure of LMR
6.2 Liquefiable assets

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6.3 Qualifying liabilities
6.4 Deductions from qualifying liabilities
6A. Application of NSFR
6A.1 Structure of NSFR
6A.2 Interdependent assets and liabilities
6A.3 Self-rectification of NSFR shortfall
6B. Application of CFR
6B.1 Structure of CFR
7. Liquidity disclosure standard
Annex 1: Assets regarded as “free from encumbrances” under LCR, LMR
and NSFR
Annex 2: Treatment of RMBS under LCR, LMR and NSFR
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1. Introduction
   1.1 Liquidity risk is the risk that an authorized institution (AI) may
   not be able to meet its obligations as they fall due without incurring unacceptable losses. This may be caused by an AI’s inability to liquidate assets or to obtain funding to meet its liquidity needs, whether because of institution-specific reasons or market stress.
   1.2 Liquidity problems can have an adverse impact on an AI’s
   earnings and capital and, in extreme circumstances, can lead to the collapse of an AI. A liquidity stress besetting individual AIs that play an active or major role in financial activities may have systemic consequences for other AIs and the banking system as a whole. It could also affect the proper functioning of payment systems and other financial markets. Sound liquidity risk management is therefore pivotal to the viability of every AI and the maintenance of overall banking stability.
   1.3 To promote the resilience of banks and banking systems to
   liquidity stress, the Basel Committee on Banking Supervision (BCBS) has issued a set of Principles for Sound Liquidity Risk Management and Supervision to strengthen international standards in this area. In addition, two quantitative metrics have been introduced by the BCBS as minimum international standards for liquidity management and supervision:
    the Liquidity Coverage Ratio (LCR), which came into operation from 1 January 2015; and  the Net Stable Funding Ratio (NSFR), which came into operation from 1 January 2018.
   1.4 In Hong Kong, it is one of the ongoing minimum criteria for
   authorization (provided in paragraph 7 of the Seventh
   Schedule to the Banking Ordinance (BO)) that the Monetary
   Authority (MA) 1 should be satisfied that an AI, on and after authorization, maintains adequate liquidity to meet its obligations as they will or may fall due; and complies with the

1
In this module, the term “MA” refers to “Monetary Authority” (the person exercising the legal authority under the Banking Ordinance) or “Hong Kong Monetary Authority” (the office of the Monetary Authority), as the context so requires.

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5 rules 2 made by the MA under §97H(1) of the BO. In this regard, the MA has made the Banking (Liquidity) Rules (BLR) under §97H(1) to prescribe the requirements in respect of –  the LCR, which is applied to AIs designated by the MA as “category 1 institutions”;  the Liquidity Maintenance Ratio (LMR), a local liquidity standard developed by the MA for application to all other AIs that are not designated as category 1 institutions, and which are referred to as “category 2 institutions”;  the NSFR, which has the same scope of application as the LCR (i.e. category 1 institutions); and  the Core Funding Ratio (CFR), a modified version of the NSFR developed by the MA for application to certain category 2 institutions which are designated as “category 2A institutions”.
1.5 Moreover, the MA has issued a Code of Practice 3
(the Code) under §97M of the BO to supplement the implementation of the LCR. Standard calculation templates are also included in the Return of Liquidity Position of an Authorized Institution (MA(BS)1E) and the Return of Stable Funding Position of an Authorized Institution (MA(BS)26) to facilitate the calculation and reporting of the relevant statutory liquidity ratios 4 by different categories of AIs.
1.6 This module (i) provides an overview of the regulatory
framework adopted by the MA for supervising AIs’ liquidity risk; and (ii) sets out the approach the MA will take in assessing AIs’ compliance with the statutory liquidity requirements.
1.7 Failure of an AI to adhere to the guidelines in this module may
call into question whether the AI continues to satisfy the authorization criterion set out in paragraph 7 of the Seventh

2 Unless otherwise specified, any “rule” cited in this module means a rule included in the BLR. 3 This refers to the Banking (Liquidity Coverage Ratio – Calculation of Total Net Cash Outflows) Code, issued by the MA in December 2014. 4 Statutory liquidity ratios refer to the LCR, LMR, NSFR and CFR.

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Schedule to the BO.
1.8 AIs are also reminded that merely complying with the statutory
liquidity requirements in the BLR or meeting the guidelines set out in this module is not of itself sufficient to constitute prudent liquidity risk management. In particular, AIs should adopt additional sound systems and controls tailored to their liquidity risk profiles, having regard to the size, nature and complexity of their businesses and activities. Please refer to the Supervisory Policy Manual (SPM) module LM-2 “Sound Systems and Controls for Liquidity Risk Management” for details.
1.9 This module should be read in conjunction with the BLR, the
Code, the Completion Instructions (CIs) for Returns MA(BS)1E and MA(BS)26, SPM module LM-2 and other relevant supervisory documents that may be issued by the MA. The terms used in this module have the meanings used in the BLR (or the Code for the LCR), as the case may be, unless otherwise specified or the context otherwise requires.
2. Approach to supervising liquidity risk
2.1 A key supervisory objective of the MA is to promote the resilience
of AIs against liquidity risk, with a view to mitigating the risks of liquidity problems affecting AIs and the banking system. To achieve this objective, every AI is required to –  maintain adequate liquidity in compliance with the minimum requirements on the statutory liquidity ratios (whichever applicable); and  put in place sound systems and controls for the management of liquidity risk. Furthermore, AIs will be expected to observe any other supervisory requirements as specified by the MA from time to time for the purpose of enhancing AIs’ liquidity risk management.
2.2 The MA adopts a risk-based supervisory approach to monitor
AIs’ liquidity positions and assess the soundness of their liquidity risk management systems and controls through a combination of supervisory actions, including (but not limited to) risk-focused off-site reviews, on-site examinations and

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7 prudential meetings. See SPM module SA-1 “Risk-based Supervisory Approach” for details of the MA’s risk-based supervisory approach.
2.3 In the course of risk-based supervision, the MA conducts off￾site analysis on an AI’s liquidity positions. The information
required for analysis is primarily obtained via the AI’s regular submissions of the following returns:
 Return on Liquidity Position of an Authorized Institution (MA(BS)1E), which reflects an AI’s liquidity position measured by the LCR or LMR;  Return on Stable Funding Position of an Authorized Institution (MA(BS)26), which reflects an AI’s stable funding position measured by the NSFR or CFR;  Return on Intraday Liquidity Position of an Authorized Institution (MA(BS)22), which reflects an AI’s intraday liquidity positions;  Return on Liquidity Monitoring Tools (MA(BS)23), which reflects an AI’s liquidity profiles with respect to (i) the level of concentration of funding sources, (ii) the amount of unencumbered assets that may be used as collateral for funding purposes, (iii) committed facilities granted and received, (iv) maturity mismatch positions, and (v), in the case of a category 1 institution, LCR positions in individual currencies; and  Return on Selected Data for Liquidity Stress-testing (MA(BS)18), which is used by the MA to collect information from locally incorporated licensed banks to facilitate supervisory stress-testing focusing on their short-term liquidity positions (covering 7 working days).
2.4 Where necessary, the MA may request an AI to provide
additional information on the AI’s liquidity positions. For example, an AI may be requested to provide its internal cash￾flow projections and liquidity stress-testing results, as well as information in respect of the associated methodologies and assumptions, to facilitate supervisory monitoring and review of the AI’s liquidity risk profile.

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2.5 In addition to conducting offsite reviews, the MA may also
conduct on-site examinations to evaluate an AI’s liquidity risk management systems and controls. The frequency and scope of coverage of such examinations are determined by the MA on a case-by-case basis, having regard to actual circumstances and the materiality of prudential concerns about a particular AI’s liquidity risk profile.
2.6 In the course of liquidity risk supervision, while the MA will have
primary regard to whether an AI complies with the requirements of the BLR and the associated supervisory documents (including the Code, this module, SPM module LM-2, and the CIs for the various liquidity returns), the MA may also take into account the AI’s compliance with other relevant guidelines and sound practices, e.g. those set out in SPM modules IC-1 “Risk Management Framework” and IC-5 “Stress-testing”.
2.7 The results of the MA’s offsite review and on-site examination
of an AI’s liquidity risk position and liquidity risk management systems will be taken into account in determining the AI’s CAMEL rating, and in the case of a locally incorporated AI, the regulatory capital requirement under the Supervisory Review Process (see SPM module CA-G-5 “Supervisory Review Process”). Where considered necessary, appropriate supervisory measures may also be taken based on such reviews and examinations.
2.8 The MA also seeks to maintain effective communications with
AIs’ boards of directors, senior management, auditors, and, where applicable, with overseas supervisory authorities to discuss prudential issues relating to the relevant AIs, including their liquidity positions and risk management controls. Such communications may be undertaken in various forms of prudential meeting or in any other appropriate means to facilitate effective exchange of views and information.
3. Statutory liquidity requirements
3.1 Liquidity Coverage Ratio (LCR)
3.1.1 The LCR is a ratio, expressed as a percentage, of the
total weighted amount of a category 1 institution’s “high quality liquid assets” (HQLA) to the total weighted amount of its “total net cash outflows” over 30 calendar

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9 days (the LCR period):
HQLA
LCR = ------------------------------------ x 100% Total net cash outflows
3.1.2 A category 1 institution must maintain an LCR of not
less than the minimum required levels specified in rule 4(1) and 4(2) as follows:
2015 2016 2017 2018 2019 and after
Minimum
LCR 60% 70% 80% 90% 100%
3.1.3 As provided in rule 4(3), failure of a category 1
institution to maintain the minimum required level of LCR will not constitute a contravention of rule 4(1) or 4(2) if, but only if, it is due to the institution’s monetization of its HQLA when the institution is undergoing significant financial stress and its financial circumstances are such as described in rule 6.
3.1.4 Specific guidance on the application of the LCR
(including the monetization of HQLA by a category 1 institution under rule 6) is provided in section 5.
3.2 Liquidity Maintenance Ratio (LMR)
3.2.1 The LMR is a ratio, expressed as a percentage, of the
amount of a category 2 institution’s “liquefiable assets” to the amount of the institution’s “qualifying liabilities” (after deductions) over a calendar month:
Liquefiable assets
LMR = ------------------------------------------------- x 100% Qualifying liabilities (after deductions)
3.2.2 As required under rule 7, a category 2 institution must
maintain an LMR of not less than 25% on average in each calendar month.
3.2.3 Specific guidance on the application of the LMR is
provided in section 6.

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3.2A Net Stable Funding Ratio (NSFR)
3.2A.1 The NSFR is a ratio, expressed as a percentage, of the amount of a category 1 institution’s “available stable funding” (ASF) to the amount of the institution’s “required stable funding” (RSF):
ASF
NSFR = --------- x 100%
RSF
3.2A.2 As required under rule 8A, a category 1 institution must at all times maintain an NSFR of not less than 100%, unless the self-rectification provisions provided in rule 8B are applicable to the institution. 3.2A.3 Specific guidance on the application of the NSFR is provided in section 6A. 3.2B Core Funding Ratio (CFR) 3.2B.1 The CFR is a ratio, expressed as a percentage, of the amount of a category 2A institution’s “available core funding” (ACF) to the amount of the institution’s “required core funding” (RCF):
ACF
CFR = ------------ x 100%
RCF
3.2B.2 As required under rule 8D, a category 2A institution must – (a) during the year of 2018, maintain a CFR of not less than 50% on average in each calendar month; and (b) on and after 1 January 2019, maintain a CFR or not less than 75% on average in each calendar month. 3.2B.3 Specific guidance on the application of the CFR is provided in section 6B.

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3.3 Implementation of statutory liquidity ratios on Hong Kong
office basis, unconsolidated basis and consolidated basis
3.3.1 §97H(3) of the BO empowers the MA to apply liquidity
requirement rules on different bases that may cover all or any part of an AI’s business operations. 5 The manner in which the MA exercises this power is provided specifically in rules 10 to 12.
3.3.2 Under rule 10(1)(a), every AI, irrespective of its place
of incorporation, must calculate the applicable statutory liquidity ratio(s), on the basis that covers all of its business in Hong Kong (Hong Kong office basis).
3.3.3 Rule 10(1)(b) requires further that an AI incorporated in
Hong Kong having any overseas branches must calculate the applicable statutory liquidity ratio(s) additionally on an unconsolidated basis covering all of its business in Hong Kong and overseas branches, unless the MA is satisfied that the liquidity risk associated with the business of an AI’s overseas branch is immaterial and hence approves, under rule 10(3)(a), the exclusion by the AI of any of its overseas branches from the calculation. In general, the MA may only grant this approval under limited circumstances, for instance, where an AI’s overseas branch has been inactive and will remain so for the foreseeable future.
3.3.4 Rule 11(1) provides that a locally incorporated AI
having any associated entity (as defined in §97H(4) of the BO) may be required by the MA to calculate the applicable statutory liquidity ratio(s) additionally on a consolidated basis, being the AI’s Hong Kong office basis or the unconsolidated basis (where applicable) plus one or more of its associated entities specified by the MA. In line with the Basel LCR and NSFR standards, such consolidation requirement will be applicable to locally incorporated AIs determined as internationally active in accordance with paragraph
4.2.2 below.

5 Please refer to §97H(3)(d) to (f) of the BO.

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3.3.5 Moreover, the MA may, pursuant to rule 12, require a
locally incorporated AI to calculate the applicable statutory liquidity ratio(s) additionally on a specially tailored basis covering any part of the AI’s business in or outside Hong Kong. The application of rule 12 to a locally incorporated AI is likely to be considered by the MA only in exceptional circumstances, where the MA is of the opinion that the bases of calculation of the applicable statutory liquidity ratio(s) required under rules 10 and 11 would be insufficient to reflect an AI’s liquidity risk profile. 6
3.3.6 In determining the consolidated group of a locally
incorporated AI for liquidity purposes, the MA may, to the extent practicable, seek to follow the scope of consolidation in respect of the AI for other regulatory purposes (for example, for the regulation of capital adequacy and large exposures). Nevertheless, this does not preclude the possibility that the MA may apply different scopes of consolidation to a locally incorporated AI for different regulatory purposes. 7
3.3.7 In particular, for liquidity purposes, the consolidated
group of a locally incorporated AI may include associated entities which may not be majority owned or controlled by the AI. In determining which associated entities of a locally incorporated AI should be included in the AI’s consolidated group for liquidity purposes, the MA will primarily have regard to (i) the respective liquidity risks that the entities concerned pose to the AI and (ii) whether the respective activities of such entities fall within any of the relevant financial

6 For example, if a locally incorporated AI is expanding the operation of an overseas branch or associated entity quickly and the MA is of the opinion that the liquidity risk arising from the operation may not have been reflected clearly in the AI’s statutory liquidity ratio(s) calculated on an unconsolidated basis or consolidated basis, the MA may require the AI to calculate the applicable statutory liquidity ratio(s) covering the branch or associated entity on a stand-alone basis. 7 For example, whilst the MA usually does not require a locally incorporated AI to include its associated entities that are securities or insurance companies (hence subject to distinct capital requirements) in its consolidated group for regulatory capital purposes, the MA may instead require the AI to include such associated entities in the scope of consolidation for liquidity purposes if the MA considers that the liquidity risks posed by these entities to the AI are significant.

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13 activities as defined in rule 11.
3.3.8 As required under rule 13(1), a locally incorporated AI
that calculates the applicable statutory liquidity ratio(s) on a consolidated basis must give notice in writing to the MA of any of the matters 8 concerning its associated entities that are specified in rule 13(2) as soon as is practicable after the institution becomes aware of the matter. This will allow the MA to review the scope of consolidation for the application of the applicable statutory liquidity ratio(s) to the AI.
3.3.9 When a category 1 institution calculates its LCR on a
basis covering any branch or associated entity operating in a host country where the associated liquidity requirement is different from that in Hong Kong, the institution should apply the requirements set out in the BLR and the Code for calculating its LCR, unless in the circumstances where rule 22(2) applies to the institution. In this case (i.e. where rule 22(2) applies), the institution should follow the requirements set out by the relevant banking supervisory authority in that host country insofar as the calculation relates to the retail deposits and small business funding of the institution’s branch or associated entity operating in that country. (Please refer to paragraphs 5.8.2 to 5.8.19 below for further guidance.)
3.3.10 Likewise, when a category 1 institution calculates its
NSFR on a basis covering any branch or associated entity operating in a host country where the associated liquidity requirement is different from that in Hong Kong, the institution should apply the requirements set out in the BLR, unless in the circumstances where rule 64(2) applies to the institution.

8 These matters basically relate to entities becoming (or ceasing to be) an AI’s associated entities and their principal activities (and changes in these activities).

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3.4 Notification of liquidity events and supervisory responses
3.4.1 Under the BO and the BLR, AIs have various
obligations to notify the MA of specified matters in respect of their liquidity positions measured by the LCR, LMR, NSFR or CFR where applicable.
3.4.2 Under rule 5, a category 1 institution is obliged to notify
the MA as soon as practicable of any anticipated change in its HQLA or total net cash outflows that will cause (or could reasonably be construed as potentially causing) its failure to maintain an LCR as required under rule 4(1) or 4(2) (where applicable). Likewise, every category 2 institution is subject to a similar requirement under rule 8 to report any anticipated change in its liquefiable assets or qualifying liabilities (after deductions) that may make it unable to maintain its LMR at a level not less than 25%. 3.4.2A For the NSFR, rule 8C requires a category 1 institution to notify the MA as soon as practicable if the self￾rectification mechanism provided in rule 8B applies to the institution (see subsection 6A.3). These notification requirements enable the MA to be alerted of any potential liquidity problem anticipated by an AI so that proactive measures can be taken as appropriate.
3.4.3 Moreover, rule 14 provides that, for the purposes of
complying with the “prescribed notification requirements” set out in §97I of the BO, an AI must immediately notify the MA of any “relevant liquidity event” prescribed in rule 14(3), and provide the MA with any particulars of the event upon request. 9 Such relevant liquidity events include – (a) for a category 1 institution:
(i) the institution failing to comply with the minimum LCR requirement specified in

9 Every director, chief executive and manager of an AI that fails to comply with a prescribed notification requirement applicable to the AI commits an offence under §97I of the BO.

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15 rule 4 where such failure does not arise from the institution’s taking action (under rule 6) to monetize its HQLA to meet its financial obligations; (ii) the institution taking, or being about to take, action under rule 6 to monetize its HQLA to meet its financial obligations to the extent that the action will cause (or could potentially cause) the institution’s failure to maintain an LCR as required under rule 4; (iii) the institution having received a notice from the MA setting out the conditions under rule 16(1) to address an event falling within subparagraph (ii) above, but failing to comply with any of the conditions; (iiia) the institution failing to comply with the minimum NSFR requirement specified in rule 8A where rule 8B does not apply to the institution; (iv) the institution, being a “rule 37 institution”10 , failing to comply with rule 37(d), meaning that the institution fails to maintain an amount of HKD￾denominated HQLA (that are level 1 assets) at a level not less than 20% of its HKD-denominated total net cash outflows; (b) for a category 2 institution: failing to comply with rule 7 (in respect of the 25% minimum LMR requirement); and

10 A “rule 37 institution” refers to a category 1 institution that applies the provisions of rule 37 in the calculation of its LCR. That rule, in conjunction with the other rules provided in Division 4 of Part 7 of the BLR, prescribes the framework of one of the options from amongst the “alternative liquidity approaches” as provided by the BCBS. For further details of this framework, please refer to subsection 5.7 below.

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(c) for a category 2A institution: failing to comply with rule 8D (in respect of the minimum CFR requirement).
3.4.4 In the case of a liquidity event that constitutes a
contravention of the BLR (and hence §97H(6) of the BO), the MA may, after holding discussions with the AI, issue a notice to the AI pursuant to §97J of the BO, requiring it to take remedial action as specified in the notice. To the extent practicable, the MA will require the AI concerned to improve its liquidity position and rectify identified liquidity management problems within a reasonable timeframe. Where the circumstances warrant, the MA may take more serious supervisory measures to maintain the general stability of the banking system and protect the interest of depositors (including potential depositors). 11
3.4.5 The MA’s potential supervisory responses to relevant
liquidity events falling within the meaning of rule 14(3)(a)(ii) and rule 14(3)(a)(iv) are elaborated upon in subsections 5.9 and 5.7 below respectively.
3.5 Internal targets and limits
3.5.1 The MA expects each institution to set up an internal
target for the applicable statutory liquidity ratio(s), taking into account the institution’s liquidity risk profile and the need to incorporate a sufficient buffer to provide the institution with a “safety cushion” above the regulatory minimum requirements.
3.5.2 The internal target should be reviewed and approved
by the board (or a board-level committee) of the institution 12 at least annually, and be properly

11 These measures may include, for example, ring-fencing the institution’s business activities (including deposit-taking activities); reviewing the fitness and propriety of any person (including a controller, director, chief executive, or manager) in the institution; exercising the powers under Part X of the BO to assume control over the institution, and suspending or ultimately revoking the institution’s authorization. 12 Unless specified otherwise, where there is a provision in this module to the effect that certain items should be reviewed or approved by the board (or a board-level committee) of an AI, it is acceptable, in the case of an AI incorporated outside Hong Kong, to have such review or approval by a designated function at the AI’s head office provided that such designation has been formally approved and documented by the AI’s board.

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17 documented in the institution’s liquidity risk management policy. The review should take into account, among other relevant factors, the historical trend of the institution’s liquidity position measured by the applicable statutory liquidity ratio(s). For example, if an institution has maintained a liquidity ratio close to the statutory minimum level or has exhibited a volatile trend in its ratio over a considerable period of time (say, during the past 12 months), it may need to provide for a more prudent “safety cushion” in its internal target ratio to ensure ongoing compliance with the minimum liquidity requirement.
3.5.3 Each AI should conduct regular projections and stress￾testing of its position measured by the applicable
statutory liquidity ratio(s) as part of its liquidity risk management process, in order to identify risk drivers that may lead to drastic fluctuations in its position. Where practicable, such projections and stress-testing should be conducted with reference to the guidance provided in sections 4 and 5 of SPM module LM-2. In addition, AIs should formulate prudent metrics and internal limits (e.g. making reference to its liquidity position measured by currencies, or to cash flows in tenor buckets that are more granular than those required by the liquidity ratio(s)) as supplementary controls to ensure compliance with the statutory liquidity requirements and enhance resilience to possible liquidity stress.
3.5.4 In the course of risk-based supervision, the MA may
request an AI to explain the rationale for its internal liquidity target, and elaborate on its methodologies for conducting projections and stress-testing in respect of its liquidity position. If necessary, the MA may subject an AI to closer supervisory scrutiny, or expect it to raise its internal liquidity target within a reasonable timeframe, if the MA considers it prudent or reasonable. To facilitate risk-based supervisory monitoring, an AI is expected to inform the MA when its position measured by any applicable statutory liquidity ratio has fallen below its internal target level and has remained close to the statutory minimum required level for a

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18 considerable period of time (e.g. less than 5 percentage points above the statutory minimum required level for three consecutive days). 13
4. Designation of category 1 institutions and category 2A institutions
4.1 General
4.1.1 In view of the diversity of AIs in terms of the nature,
size and complexity of their business operations, the MA considers it appropriate to tailor proportionate liquidity requirements for different types of AIs taking into account their specific characteristics.
4.2 Designation of category 1 institutions
4.2.1 Under rule 3(1), the MA may designate an AI as a
category 1 institution if he is satisfied that any of the grounds specified in Part 1 of Schedule 1 to the BLR (Specified Grounds) is applicable to the AI. (In the case of an AI that applies for the designation but none of the grounds specified in Part 1 of that Schedule is applicable to the AI, please refer to subsection 4.4 below). Other AIs not designated as “category 1 institutions” are regarded as “category 2 institutions”.
4.2.2 Ground 1: The AI is internationally active. In
determining whether an AI is internationally active, the MA will assess the level of the AI’s international exposure, as measured by the aggregate amount of its external claims and liabilities, against a quantitative benchmark. 14

13 This expectation to inform the MA does not replace any formal notification requirement under the BLR. 14 The adoption of this measure recognises that an AI with a significant level of external claims and liabilities tends to be more vulnerable to spill-over effects from crises and shocks that may occur in other countries. The MA relies mainly on the data reported by the AI in Part I of the Return of International Banking Statistics (MA(BS)21A) to assess the level of its external claims and liabilities against the quantitative benchmark. Under this benchmark, the external claims and liabilities associated with an AI’s intra-group entities are not excluded on the premise that such claims and liabilities result from banking activity involving entities in different countries, and thus still pose a degree of cross-border risk to the AI concerned. Currently, the benchmark for international exposure is set at HK$250 billion. This benchmark will be subject to review from time to time, taking into account the prevailing circumstances of the local

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4.2.3 Ground 2: The AI is significant to the general stability
and effective working of the banking system in Hong Kong. In assessing the level of significance of an AI to the local banking system, the MA will consider:
(a) the size of the AI’s business operation, as measured by the amount of its total assets (after provisions), against a quantitative benchmark; 15 and (b) the AI’s role (including any special function undertaken) or level of participation in the local banking system or financial markets 16 . Primary focus is placed on whether the AI may act as a significant conduit for transmitting liquidity problems across AIs, or may have a significant impact on the local banking system, financial markets and/or other stakeholders (e.g. depositors, retail investors, etc.) should the AI get into financial difficulty or should the relevant financial role or function performed by the AI, or its participation in a particular market activity, be disrupted. 17

banking sector, including (but not limited to) the medium- to long-term trend of the banking sector’s aggregate amount of international exposure. 15 The adoption of this measure recognises that AIs with a sizable operation tend to pose a higher level of risk and have a potentially greater impact on local banking stability if they encounter financial problems. As with the other benchmark for international exposure, the benchmark for total asset size is also set at HK$250 billion, which will be reviewed from time to time. In the assessment of a locally incorporated AI without any overseas branch or an overseas incorporated AI, the benchmark is applied to the AI’s “total assets (after provisions)” covering its Hong Kong office position, as reported by the AI in the Return of Assets and Liabilities of an Authorized Institution (MA(BS)1). In the case of a locally incorporated AI that has overseas branch operation, the benchmark is applied to the AI’s “total assets (after provisions)” covering its unconsolidated position (i.e. the combined position of its Hong Kong office and all overseas branches), as reported by the AI in the Combined Return of Assets and Liabilities of an Authorized Institution (MA(BS)1B). 16 Such markets may relate to wholesale funding, derivatives, securitization or other traded markets. 17 The crucial roles that an AI may play, or important functions that it may undertake, in the local banking system include, but are not limited to, a banknote-issuing function and serving as a clearing and settlement bank for major payment and settlement systems in Hong Kong.

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4.2.4 Ground 3: The liquidity risk associated with the AI is
material. For the purposes of rule 3, the MA will have special regard to the nature and complexity of an AI’s business operation and its risk profile, with a view to assessing whether there may be material liquidity risks inherent in such operation that warrant the application of a set of more sophisticated and granular liquidity metrics (i.e. the LCR and NSFR) to the AI. 18
4.2.5 Ground 4: The AI is so connected to another AI (being
a category 1 institution) that if the first-mentioned AI were not to be designated as a category 1 institution, such connection would prejudice, or may potentially prejudice, the calculation of the LCR by the second￾mentioned AI, the calculation of the LMR by the first￾mentioned AI, or both. As differences exist in the design of the LCR and LMR, there may be potential for connected AIs that are not in the same category (i.e. category 1 or category 2) to engage in a degree of regulatory arbitrage (e.g. through intra-group transfers of assets and liabilities) for the purpose of reducing their regulatory liquidity requirements. As a safeguard, if the risk of regulatory arbitrage for such connected AIs is considered high, the MA may decide to designate all of them as category 1 institutions even though they do not all meet one of the other grounds for such designation.
4.2.6 Where there may be a potential risk of regulatory
arbitrage for a group of connected AIs, the MA will assess the risk based on the specific circumstances of the case. Some relevant factors for consideration include the corporate structure, business size and risk profile of the connected AIs concerned, and any track record of intra-group interactions observed in the

18 For example, the MA may assess, among other things, whether an AI is active in derivative, securitization and other structured financing transactions or has significant exposures to complex financial instruments, as well as the adequacy of its systems and controls for managing liquidity risks arising from such transactions or instruments.

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21 course of supervision. 19
4.2.7 Whilst the MA expects that in most cases the indicators
and benchmarks referred to in paragraphs 4.2.2 to
4.2.6 above will be sufficient for the MA to make the
assessment, there may still be cases where an AI’s fulfilment of the Specified Grounds can only be observed by reference to other factors. In these cases, the MA will discuss the rationale behind the designation with the AI concerned.
4.2.8 The MA will adopt, as appropriate, a forward-looking
approach in assessing AIs relative to the Specified Grounds by taking into account any forthcoming business plan or development affecting an AI (such as anticipated business expansion or contraction, mergers or acquisitions, or any other new, or change in, business strategy) that may result in the AI meeting, or no longer meeting, the Specified Grounds.
4.2.9 The MA will normally assess whether an AI should be
designated under rule 3 on a single entity basis.
However, there may be circumstances that warrant a group approach to determining the designation of connected AIs (such as by consolidating the positions of the connected AIs as if they were a single entity) if, for example, the AIs’ business operations in Hong Kong are closely integrated, or there is a specific plan for merging the AIs’ business activities. Restricted licence banks and deposit-taking companies
4.2.10 In general, it is not likely that the MA would designate
restricted licence banks (RLB) or deposit-taking companies (DTC) as category 1 institutions in the light of their relatively small, simple and localised operations, which typically render the grounds specified in paragraphs 4.2.2 and 4.2.3 not applicable to these types of AIs. Nonetheless, the MA retains the

19 Concern over regulatory arbitrage relates mainly to those AIs which are connected to the category 1 institution but are not subject to the MA’s consolidated supervision in respect of their liquidity positions.

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22 power to designate an RLB or DTC as a category 1 institution if warranted by exceptional circumstances, in which case the MA will explain the underlying reasons for the designation to the AI concerned. Consideration of overseas incorporated AIs under rule 3(4)
4.2.11 As provided by rule 3(4), the MA may decide not to
designate an AI as a category 1 institution in the circumstances specified in Part 3 of Schedule 1 to the BLR, notwithstanding that the AI may otherwise meet any of the Specified Grounds.
4.2.12 For instance, some overseas incorporated banks
operating branches in Hong Kong are affiliated to international banking groups. Their branches in Hong Kong may be covered by their groups’ global liquidity management models and the consolidated LCR or NSFR requirements imposed on their groups by the relevant home supervisors. In these circumstances, the MA considers it reasonable to allow some degree of reliance on the “group” liquidity of overseas incorporated AIs, and may apply rule 3(4) if the circumstances specified in §2 of Part 3 of Schedule 1 to the BLR are met:
(a) the AI is adequately supervised in respect of liquidity risk by the relevant banking supervisory authority of the place of its incorporation – The liquidity requirements and supervisory standards applicable to the AI on a group basis covering its Hong Kong branch should be comparable to international liquidity standards, including the LCR and NSFR, and the Principles for Sound Liquidity Risk management and Supervision set out by the BCBS; and (b) the AI complies with the liquidity requirements in the place of its incorporation – Upon request by the MA, the AI should be able to demonstrate that its banking group (covering its Hong Kong branch) is able to meet the relevant liquidity requirements in its home

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23 country.
4.2.13 The MA may also, in its review of the criteria discussed
in paragraph 4.2.12, take into account other related factors, such as – (a) Global liquidity risk management system – The foreign banking group’s global liquidity risk management system should enable its Hong Kong branch to fulfil the MA’s liquidity requirements in all major aspects, including the requirements relating to the LMR (and CFR where applicable) as set out in the BLR (in case the AI concerned is not designated as a category 1 institution) and other relevant guidelines on liquidity risk management and controls, as specified in SPM module LM-2 20; and (b) Effective home-host information sharing arrangements – There should be in place effective communication and information￾sharing channels between the MA and the foreign banking group’s home supervisor such that the MA is able to obtain supervisory opinions and relevant information from the home supervisor on the foreign banking group’s liquidity position on a timely basis.
4.2.14 The MA may utilise any available channels to obtain
information for the assessment of the above “group factors” relevant to an overseas incorporated AI. For this purpose, the MA may communicate with the AI’s Hong Kong branch or head office, or initiate supervisory dialogues with the AI’s home supervisor if necessary. Where appropriate, the MA may draw

20 For example, the stressed liquidity needs of the Hong Kong branch have been duly taken into account in the group’s centralised liquidity pools and that there are credible arrangements to enable timely transfer of funds to the Hong Kong branch if necessary. Moreover, the AI should be able to demonstrate that there is no legal or regulatory impediment (such as exchange control or remittance restriction) that prohibits the foreign bank from transferring liquidity to its Hong Kong branch as and when necessary.

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24 reference from the report on a country’s liquidity supervisory framework that may be issued by the BCBS under its Regulatory Consistency Assessment Programme.
4.2.15 The application of rule 3(4) is a discretion of the MA
exercised on a case by case basis. The MA may review the designation of overseas incorporated AIs having regard to, for example, to what extent and for how long the overseas incorporated AI’s international exposure and/or business operation has exceeded the quantitative benchmark. Newly authorized AIs
4.2.16 In the case of new authorizations, the MA will consider
whether the applying institution should be designated as a category 1 institution if it is authorized, by reference to the institution’s medium-term business plan (usually covering 3 years) and other information provided to the MA for authorization purposes. After authorization, the MA will monitor the institution’s actual operation to decide whether the designation should be maintained or changed.
4.3 Revocation of designation
4.3.1 Pursuant to rule 3(5), the MA may revoke the
designation of an AI as a category 1 institution if the MA is satisfied that had the designation not been made, he would not now make the designation. Practically, this means that the AI concerned no longer meets any of the Specified Grounds that had originally prompted the MA to designate it as a category 1 institution, or such grounds will not be met in the near future (e.g. due to a permanent change in the institution’s financial position, corporate structure or business strategy). 21

21 Temporary or sporadic changes are not regarded as sufficient grounds for the MA to designate, or revoke the designation of, an AI as a category 1 institution.

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4.4 Application for designation (or revocation of designation)
4.4.1 Decision by the MA under rule 3(1) and (5) may be
made upon an application by an AI. Upon receipt of the AI’s application for designation as a category 1 institution, the MA will approve the application pursuant to rule 3(1) if – (a) any of the Specified Grounds is applicable to the AI; or (b) the MA is satisfied that both the grounds set out in Part 2 of Schedule 1 to the BLR are applicable to the AI. This means that the AI’s particular circumstances provide reasonable justification for it to be designated as a category 1 institution; 22 and the AI has the capacity (including systems and resources) to comply with the LCR and NSFR requirements.
4.4.2 In the case of a category 1 institution that applies for
revocation of its designation as such, the institution must demonstrate to the MA’s satisfaction that the conditions set out in rule 3(5) (as elaborated in subsection 4.3 above) are no longer applicable to it, or will no longer be applicable to it starting from a specific date. The MA will review critically whether there is any case to revoke the designation of the applying institution.
4.4.3 Any AI seeking to apply for designation (or revocation
of designation) as a category 1 institution should discuss its intention with the MA before submitting a formal application.
4.5 Ongoing review of designation
4.5.1 In the course of risk-based supervision, the MA may
review whether a category 2 institution should be

22 For example, an AI, being a part of a foreign banking group which implements the LCR and NSFR at the group level, may have a case to seek designation by the MA as a category 1 institution for the sake of consistency with its group’s liquidity risk management framework.

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26 designated as a category 1 institution, or whether the designation of an AI as a category 1 institution should be revoked, for example, if the MA is aware of a significant change in circumstances in respect of the AI that may affect the MA’s decision under rule 3.
4.5.2 As required under rule 15, if a category 2 institution
foresees any material change in its business plan or circumstances that may result in it satisfying any of the Specified Grounds, it must notify the MA as soon as practicable.
4.5.3 If the MA envisages the need to designate, or revoke
the designation of, an AI as a category 1 institution, the MA will enter into discussion with the AI concerned to explain the ground for making the change. When the MA’s decision is finally issued, the AI will be given a grace period 23 to prepare for implementing the newly applicable statutory liquidity ratio(s). In these circumstances, the AI concerned will be expected to agree with the MA on an implementation plan in order to ensure the institution’s prompt compliance with the newly applicable requirement.
4.6 Designation of category 2A institutions
4.6.1 Under rule 3A(1), the MA may designate a category 2
institution as a category 2A institution if he is satisfied that it is prudent and reasonable to apply the CFR requirement to the institution, taking into account – (a) the size of the institution’s business operation; and (b) the liquidity risks associated with the institution.
4.6.2 In assessing an institution’s business size, the MA will

23 The grace period will be specified in the MA’s notice to be issued to the AI through the denotation of the effective date of the designation or revocation of designation, as the case may be. Normally, the length of the grace period will not be less than 6 months. A longer grace period may be allowed if the actual circumstances of an individual case so warrant.

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27 consider the amount of the institution’s total assets (after provisions) against a quantitative benchmark. 24
4.6.3 In determining the designation, the MA will also have
regard to the liquidity risks associated with an institution to see if any exceptional designation (or exemption) is warranted. The major factors for assessment are similar to those elaborated in paragraph 4.2.4 and 4.2.5.
4.6.4 The operational details for the designation of category
2A institutions are set out below, which are in line with the corresponding details for the designation of category 1 institutions, with appropriate modifications. (a) The MA will adopt, as appropriate, a forward￾looking approach in considering the designation of category 2A institutions. (b) The MA will normally assess whether an institution should be designated as a category 2A institution on a single entity basis, unless the actual circumstances warrant the adoption of a “group approach” to determining the designation of connected institutions. (c) In the case of new authorization, the MA will consider whether the institution should be designated as a category 2A institution by reference to the institution’s medium-term business plan (usually covering 3 years) and other information provided to the MA for authorization purposes. (d) pursuant to rule 3A(4), the MA may, whether on volition or on application by an institution, revoke the designation of the institution as a

24 Currently, the benchmark for considering a potential category 2A institution’s total asset size is HK$20 billion for a locally incorporated institution, or HK$100 billion for an overseas incorporated institution’s Hong Kong branch. For application details with respect to locally incorporated institutions, please refer to footnote 15.

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28 category 2A institution if the conditions set out in that rule are satisfied. In the case of a category 2A institution that applies for revocation of its designation, the institution must demonstrate to the MA’s satisfaction that the conditions set out in rule 3A(2) are no longer applicable to it, or will no longer be applicable to it starting from a specific date. (e) Any category 2A institution seeking to apply for revocation of designation should discuss its intention with the MA before submitting a formal application. (f) Before making any change in the designation of a category 2A institution, the MA will enter into discussion with the institution to explain the ground for making the change. The institution will be given a grace period to prepare for implementing the CFR requirement. It should also agree with the MA on an implementation plan.
5. Application of LCR
5.1 Structure of LCR
5.1.1 The LCR has two components:
(a) The numerator is the total weighted amount of HQLA held by a category 1 institution, including the sum of weighted amounts of level 1 assets, level 2A assets and level 2B assets, net of any adjustments that may be caused by the applications of the ceilings on level 2 assets (see subsection 5.6) and the ALA (see footnote 10 and subsection 5.7). (b) The denominator is the “total net cash outflows”, which means a category 1 institution’s “total expected cash outflows” after deduction of its “total expected cash inflows”, where the amount of deduction shall not exceed 75% of the total expected cash

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29 outflows.
5.2 High quality liquid assets (HQLA)
General
5.2.1 As a basic principle, a category 1 institution should
include assets as its HQLA only to the extent that they can be easily and immediately monetizable at all times within the LCR period with little or no loss of value. As provided in rule 25, a category 1 institution must not include an asset in its HQLA unless – (a) the asset falls within a class of assets specified in Schedule 2 to the BLR and meets the qualifying criteria (if any) specified in that
Schedule for that class of assets;
(b) the asset satisfies all the characteristic requirements specified in Schedule 3 to the BLR that are applicable to the asset; (c) the asset satisfies all the operational requirements specified in Schedule 4 to the BLR that are applicable to the asset; and (d) the institution satisfies all the operational requirements specified in Schedule 4 to the BLR that are applicable to the institution insofar as those operational requirements relate to the asset.
5.2.2 Category 1 institutions should put in place appropriate
systems and procedures to evaluate whether the requirements provided in rule 25 are satisfied in order for a particular asset to be included in an institution’s HQLA. This assessment should be conducted periodically by an appropriate function (e.g. risk management or compliance function) within the institution, and proper arrangements should be in place to ensure sufficient checks and balances in the assessment process.

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Characteristic requirements
5.2.3 The characteristic requirements set out in Schedule 3
to the BLR are elaborated below:
(a) Low risk – The risks (including, for example, credit risk, interest rate risk, legal or any other types of risk) associated with the asset should be sufficiently low, so that they do not prejudice the asset’s ability to be monetizable. For example, high credit standing of the issuer and a low degree of subordination increase an asset’s liquidity. Low duration 25 , low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhance an asset’s liquidity. (b) Ease and certainty of valuation – The value of the asset should be readily identifiable and measurable, and can be readily agreed on by parties to a transaction involving the asset, whether by reference to the asset’s book value or current market price, or a simple valuation method or pricing formula based on publicly available market data. (c) Simple structure – If the asset is a structured financial instrument, the structure of the instrument should be simple and standardised and it should not inhibit valuation or risk assessment. This implies that most structured financial instruments are usually not recognised as HQLA, except qualifying covered bonds and residential mortgage-backed securities (RMBS). (d) Low correlation with risky assets – The asset should not have a strong correlation with another asset that carries material risks, nor

25
“Duration” measures the price sensitivity of a fixed income security to changes in interest rate.

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31 should it significantly expose the holding institution to specific wrong-way risk or general wrong-way risk 26 . For example, securities issued by financial institutions are usually not qualified for inclusion as HQLA, save for a limited number of exceptions, such as qualifying covered bonds and RMBS, and securities issued by a financial institution which is a public sector entity (PSE). (e) Active and sizable market with low volatility – If the asset is traded in a secondary market (whether for outright disposal or securities financing transactions), the market should be active and sizable such that the asset can be readily monetized without a substantial discount or haircut to its market price. 27 The historical volatility associated with the trading prices and spreads of the asset should be demonstrably low. In this regard, specific thresholds on price volatility are set out in §4 to §8 of Part 3 of Schedule 2 to the BLR as one of qualifying criteria for the inclusion of specific types of assets as HQLA – please refer to paragraphs 5.4.1(a)(iii) and (b)(iii), 5.5.2(a)(ii) and paragraph 3(d) in Annex 2.

26
“Specific wrong-way risk” has the meaning given in §226A of the BCR. It means the risk that arises when the exposure to a counterparty is positively correlated with the probability of default of the counterparty due to the nature of the transactions with the counterparty. “General wrong-way risk” has the meaning given in §1(h) of Schedule 2A to the BCR. It means the risk that arises when the probability of default of counterparties is positively correlated with general market risk factors. 27 In assessing this characteristic requirement in respect of an asset (such as marketable debt securities, covered bonds or RMBS), major factors for consideration include, for example:
 whether the asset is traded publicly in a recognized exchange (as referred to in paragraph 5.2.3(f)), or traded over-the-counter with a considerably large number of market participants;  the availability of committed market makers to maintain the asset’s market liquidity;  the levels and trends of the asset’s market transaction volume and pricing spread; and  the robustness and efficiency of the clearing and settlement systems in respect of the asset market.

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(f) Listed on a developed and recognized exchange – If the asset is listed on an exchange, the exchange should be a “recognized exchange”. Generally, this may include any recognized exchange as defined under §2(1) of the Banking (Capital) Rules (BCR) (which refers to any of those exchanges specified in Part 2 or 3 of
Schedule 1 to the Securities and Futures
Ordinance).
(g) Denominated in convertible currency – The asset is denominated in Hong Kong dollars (HKD) or in a currency freely convertible into HKD. 28
5.2.4 In addition to the above characteristic requirements (as
set out in Schedule 3 to the BLR), ideally an asset included by a category 1 institution in its stock of HQLA should be capable of being used by the institution as collateral to borrow intraday or overnight funding from the MA (or any overseas central bank). The asset ideally should also have the potential to benefit from a “flight to quality” (meaning that its characteristics are such that it has the potential to attract investors to switch their funds into it) in times of stress. Operational requirements
5.2.5 In addition to meeting the characteristic requirements
stated above, any asset to be included by a category 1 institution as HQLA must be free from any operational restrictions that would prevent timely monetization of that asset during a stress period. The institution must have in place and maintain adequate operational capacity and systems to readily monetize any asset in

28 If a category 1 institution has a banking operation in an overseas country where the local currency is not convertible into HKD, the HQLA denominated in that local currency held by the banking operation in that country can only be used to cover the liquidity needs arising from the banking operation in that country. Therefore a category 1 institution should treat this portion of HQLA according to rule 23 or 24 (in respect of the treatment of “liquidity transfer restrictions”) in calculating its LCR on a consolidated basis or unconsolidated basis covering its overseas banking operation.

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33 its HQLA without being constrained by any internal business or risk management strategy.
5.2.6 Specific operational requirements set out in Schedule
4 to the BLR are elaborated below:
(a) any asset included by a category 1 institution as its HQLA should be – (i) managed by a liquidity management function 29 designated by the institution for the purpose which has the continuous authority and legal and operational capability to monetize any asset in the institution’s HQLA; and (ii) maintained in a separate pool of assets under the control of the institution’s designated liquidity management function with the sole intent of being used as a source of contingency funding, unless it is clear and can be demonstrated to the MA that the designated function can monetize any asset in the institution’s HQLA (irrespective of where it is maintained within the institution) and the proceeds are available to the designated function without direct conflict with the institution’s internal business or risk management strategy, at any time within a period of financial stress that lasts for 30 calendar days; (b) a category 1 institution should be able to access relevant markets for monetizing

29 Depending on the practical circumstances, the “liquidity management function” of an AI may be performed by a person, a functional department, or a committee. The composition, authorities and responsibilities of that function should be clearly delineated and approved by the institution’s board (or board-level committee), which assumes the ultimate governance responsibility over that function. The head of the function should be a manager under the meaning of §72B of the BO, or a director or chief executive (or alternate chief executive) approved by the MA under §71 of the BO.

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34 assets in its HQLA as necessary. This ability should be tested or verified by periodical monetization of a representative portion of its HQLA in the relevant markets, unless this ability can be demonstrated satisfactorily through transactions conducted in the normal course of business operation; (c) an asset included in HQLA must be free from encumbrances, and, in particular, there must be no regulatory, legal, contractual or other restrictions that inhibit the institution from liquidating, selling, transferring or assigning any asset in its HQLA (please refer to Annex 1 for further guidance on the meaning of “free from encumbrances”); (d) the institution should maintain adequate policies, procedures and systems to enable close monitoring (at least daily) of its HQLA. It should have sufficient knowledge of its HQLA, including the size, composition by types of assets and currency denominations, holding offices, locations, and custodial or other account in which the assets are held. In this regard, daily management reports covering the relevant information in respect of HQLA should be generated to facilitate internal monitoring; (e) the assets in the institution’s HQLA must be freely transferable and available to the institution, whether between its Hong Kong office and any of its overseas branches and specified associated entities (where applicable), and the assets must not be subject to any liquidity transfer restriction; 30

30 If an asset is held by the institution in a legal entity that does not have access to relevant markets for monetizing the asset, the asset is not deemed to be freely transferable unless the asset can be freely transferred to the institution (or to a specified associated entity of the institution) that can monetize the asset.

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35 and
(f) if an asset is included in the institution’s HQLA and it is likely to be monetized through direct sale, there must be no impediments to the sale of the asset and there must be no requirements to hold such asset, including, but not limited to, statutory minimum inventory requirements if the institution is a market maker for assets of that type. Exclusion of non-qualifying assets
5.2.7 An asset will cease to qualify as HQLA if it fails to
satisfy any condition set out in rule 25 continuously. In these circumstances, a category 1 institution must exclude the asset from its HQLA within 30 calendar days of the assets ceasing to satisfy the condition. If the institution only becomes aware of the cesser after the 30-day period, it should exclude the asset from its HQLA immediately.
5.2.8 On the grounds specified in rule 29 (or rule 30), the MA
may require all category 1 institutions (or a particular institution) not to include a particular asset or a class of assets as HQLA 31 . When determining the effective date and any applicable conditions in respect of any such requirement, the MA will normally provide a lead-time of not less than 30 calendar days for the institution(s) concerned to adjust the composition of their HQLA, taking into account the actual circumstances. Management of foreign exchange risk and concentration risk associated with HQLA
5.2.9 As required under rule 27(2), a category 1 institution

31 AIs should conduct regular reviews of their HQLA portfolios and carve out any asset that cannot, or can no longer, meet the prescribed criteria. Rules 29 and 30 are intended to cater for exceptional circumstances that may require the HKMA to announce that AIs (or a particular AI) must reject a particular asset (or a particular type of assets) as HQLA. For example, if the shares of a particular listed company are suspended for trading for a considerable period of time but there is a general observation that AIs have not carved out those shares as HQLA, the HKMA might need to make a notice under rule 29 to reject such shares as HQLA.

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36 must put in place and maintain adequate systems and procedures to manage the foreign exchange risk associated with its HQLA, including – (a) managing its ability to access relevant foreign exchange markets taking into account the risk that access to such markets may be hindered in times of financial stress; (b) managing its HQLA so that the HQLA is capable of generating liquidity to meet the institution’s total net cash outflows in different currencies; and (c) managing the composition of its HQLA by currency so that the HQLA is broadly consistent with the distribution of its total net cash outflows by currency.
5.2.10 To ensure compliance with rule 27(2), a category 1
institution should put in place a robust risk management system in line with the guidance set out in section 6 of SPM module LM-2 and, where appropriate, SPM module TA-2 “Foreign Exchange Risk Management”.
5.2.11 In principle, the above requirements are applicable to
each currency in which a category 1 institution has a liquidity need (as measured by total net cash outflows in that currency). The MA will in practice have primary regard to an institution’s liquidity positions in HKD, US dollars (USD), renminbi and any other currency that is a “major currency” 32 or is significant 33 to the institution. Moreover, the MA may also look into an institution’s liquidity position in any other currency if warranted by the actual circumstances. 34

32 For the meaning of a “major currency”, please refer to footnote 61. 33 A currency is considered to be “significant” to an AI if the AI’s liabilities denominated in that currency account for 5% or more of its total liabilities (including shareholders’ funds). 34 For example, if a category 1 institution is expanding its banking business in an overseas country substantially or swiftly, the MA may have specific regard to the institution’s liquidity position in the

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5.2.12 With respect to the requirements set out in rule 27(2)(b)
and rule 27(2)(c), a category 1 institution is not required to match the currency composition of its HQLA with that of its total net cash outflows fully at all times. This recognises the fact that a certain level of currency mismatch may arise in the normal course of banking operations. However, it is generally expected that each category 1 institution should establish internal limits for its LCR in individual currencies including at least HKD, USD, renminbi and any other currency that is a “major currency” or is significant to the institution. Such limits should be set having regard to relevant factors such as the transferability of liquidity in different currencies. Any position exceeding such internal limits should be reported to the institution’s senior management to ensure a prompt management review of the institution’s liquidity risk profile. (Please also refer to subsection 5.7 below with respect to the use of the ALA.) Diversification by class of assets in HQLA
5.2.13 Rule 28 requires that a category 1 institution must
have in place and maintain adequate policies and limits to control the level of concentration of its HQLA in order to avoid undue exposure to a particular class of asset, type of issue, issuer or currency. In this regard, a category 1 institution should follow the guidance provided in section 7 of SPM module LM-2.
5.3 Level 1 assets
5.3.1 Level 1 assets are confined to –
(a) currency notes and coins;
(b) withdrawable central bank reserves; 35

local currency of that country irrespective of whether the position meets the “5%” significance threshold. 35 The meaning of “withdrawable central bank reserves” is provided in rule 17, supplemented with the elaboration provided in the CIs for item A1(b) in Section (I) of Part 2 of the Return MA(BS)1E.

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(c) marketable debt securities that are issued or guaranteed by a sovereign, central bank, PSE, relevant international organization or multilateral development bank, or that are EF debt securities, and – (i) qualify, in the calculation of credit risk under the standardized (credit risk) approach (STC approach), for a 0% risk-weight; 36 (ii) are traded in large, deep and active markets, characterised by a low level of concentration, and where the debt securities can be monetized through direct sale or repo-style transactions; 37 (iii) have a proven record as a reliable source of liquidity in those markets even during a period of financial stress; and (iv) are not an obligation of a financial institution, or an associated entity of a financial institution, that is not a PSE bank; 38 (d) marketable debt securities that are issued by the sovereign or central bank of a country and denominated in the local currency of that

36 For the purpose of identifying this class of level 1 assets, the risk-weights of marketable debt securities should be determined under the STC approach pursuant to the following sections under
Part 4 of the BCR:
Marketable debt securities issued or guaranteed by: Applicable provisions in BCR:
 Sovereign or central banks  §55(2)
 PSE  §57(2)(b)
 Relevant international organizations  §56(4)  Multilateral development banks  §58 37 Please refer to footnote 27 for the major factors that should be considered in assessing an asset’s compliance with this criterion. 38 In determining whether a financial institution in another country should be regarded as a PSE or sovereign entity, the MA may, where appropriate, have regard to the categorisation adopted by the banking supervisory authority of the country concerned for LCR purposes.

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39 country, or that are EF debt securities 39, and which, under the STC approach, do not qualify for 0% risk-weight under §55(2) of the BCR, or qualify for 0% risk-weight only by virtue of §56(1) or (2) of the BCR, where the category 1 institution is incorporated in that country, or carries on a banking business in that country through a branch or subsidiary; (e) marketable debt securities that are issued by the sovereign or central bank of a country and denominated in a currency that is not the local currency of that country and which do not, under the STC approach, qualify for a 0% risk-weight under §55(2) of the BCR, subject to the following conditions:
(i) the institution must be incorporated (or carry on a banking business through a branch or subsidiary) in the country in which the issuer of such securities is located; and (ii) the amount of such debt securities to be included in this category of level 1 asset must not exceed the amount of total net cash outflows in the currency of the debt securities arising from the institution’s banking business in the country in which the debt securities are issued. 40

39 If EF debt securities no longer qualified for a 0% risk-weight under the BCR, such securities would still be recognised as level 1 assets falling within subcategory (d) (instead of (c)), to the extent that such securities are used by a category 1 institution to cover liquidity needs arising from its operation in Hong Kong. 40 For example, if debt securities issued by the sovereign or central bank in Country A are denominated in Currency B which is not the local currency of Country A, a category 1 institution can only recognise such debt securities as level 1 assets under subcategory (e) up to an amount not exceeding the institution’s total net cash outflows in Currency B, as generated from the institution’s banking business operation in Country A.

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5.4 Level 2A assets
5.4.1 Level 2A assets are confined to –
(a) marketable debt securities issued or guaranteed by a sovereign, central bank or PSE, which – (i) qualify for a 20% risk-weight under the STC approach; 41 (ii) are traded in large, deep and active markets, characterised by a low level of concentration, and where the debt securities can be monetized through direct sale or repo-style transactions; (iii) have a proven record as a reliable source of liquidity in the markets even during a period of financial stress. As a quantitative criterion, a debt security must not have experienced a decline of more than 10% of its market price, or an increase in haircut of more than 10 percentage points if it is used as collateral in a repo-style transaction, within any period of 30 calendar days during a “relevant period of significant liquidity stress” since the debt security was issued (where applicable), or in the absence of such a “relevant period of significant liquidity stress”, any such period of 30 calendar days since the debt security was issued 42; and

41 The risk-weight as referred to this condition should be determined under §55(2) of the BCR in any case where the security is issued or guaranteed by a sovereign or central bank, or under §57 of the BCR in any case where the security is issued or guaranteed by a PSE. 42 In determining whether a marketable debt security, covered bond, RMBS or listed ordinary share can be included as HQLA, the price volatility criterion set out in §4(3), §5(3), §6(3), §7(3), §8(3) and §10(2) of Part 3 of Schedule 2 to the BLR should be applied in such a way that a “relevant period of significant liquidity stress” means –

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(iv) are not an obligation of a financial institution, or an associated entity of a financial institution, that is not a PSE bank; (b) marketable debt securities issued by corporates which – (i) satisfy the requirement set out in §5(1)(a), (b) or (c) of Part 3 of
Schedule 2 to the BLR. In other words,
the securities must have a long-term
ECAI issue specific rating of not lower than AA-, or an equivalent level of short-term ECAI issue specific rating, and hence have a “credit quality grade” of 1 under Part 4 of the BCR; 43 (ii) are traded in large, deep and active markets, characterised by a low level of concentration, and where the securities can be monetized through direct sale or repo-style transactions; (iii) have a proven record as a reliable source of liquidity in the markets even during a period of financial stress. (As a quantitative criterion, a debt security

 if a debt security was issued, or a share was listed, on or before 1 January 2007, any period of 30 calendar days since that date; or  if a debt security was issued, or a share was listed, after 1 January 2007, any period of 30 calendar days since the issuance date in respect of the security or the listing date of the share. 43 If a corporate debt security held by a category 1 institution does not have an ECAI issue specific rating and the institution is approved by the MA (or in the case of an overseas incorporated institution, its home supervisor) to use the internal ratings-based approach for regulatory capital purposes, the institution may include the security in this category of HQLA if the security is internally rated by the institution as having a probability of default corresponding to the required credit quality grade. This provision can also be applied in lieu of the conditions with respect to ECAI issue specific ratings set out in–  paragraph 5.4.1(c)(i) for recognising covered bonds as level 2A assets;  paragraph 5.5.2(a)(i) for recognising corporate debt securities as level 2B assets; and  paragraph 3(b) in Annex 2 of this module for recognising RMBS as level 2B assets.

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42 must not have experienced a decline of more than 10% of its market price, or an increase in haircut of more than 10 percentage points if it is used as collateral in a repo-style transaction, within any period of 30 calendar days during a “relevant period of significant liquidity stress” since the debt security was issued (where applicable), or in the absence of such a “relevant period of significant liquidity stress”, any such period of 30 calendar days since the debt security was issued); (iv) are not issued by a financial institution or any of its associated entities; and (v) are not structured financial instruments or subordinated debt securities; (c) covered bonds which – (i) have a long-term ECAI issue specific rating of not lower than AA-; 44 (ii) satisfy the same criteria set out in subparagraphs (b)(ii) and (iii) above, and (iii) are not issued by the institution holding the bonds or any of the institution’s associated entities.
5.5 Level 2B assets
5.5.1 Under the BCBS LCR standard, certain types of assets
can be recognised as level 2B assets under the LCR at the discretion of national authorities. Such assets include (i) certain marketable debt securities rated BBB- or above; (ii) listed ordinary shares of corporates

44 Please refer to footnote 43.

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43 included in a main index; and (iii) RMBS rated AA or above. Moreover, national authorities may accept committed facilities provided by a central bank as a source of liquidity equivalent to level 2B assets, subject to certain restrictions (RCLF) 45. National authorities are expected to determine the extent to which level 2B assets (including RCLF) can be recognised as HQLA taking into account the local circumstances.
5.5.2 The MA accepts the following classes of level 2B
assets:
(a) marketable debt securities issued by corporates, sovereigns, central banks and PSE, where the securities – (i) satisfy the requirement set out in, where applicable, §7(1)(a), (b), (ba). (bb) or (c) of Part 3 of Schedule 2 to the BLR. In other words, the securities must have a long-term ECAI issue specific rating of BBB- or above, or an equivalent level of short-term ECAI issue specific rating; 46 (ii) are traded in large, deep and active markets, characterised by a low level of concentration, and where the securities can be monetized through direct sale or repo-style transactions; (iii) have a proven record as a reliable source of liquidity in the markets even during a period of financial stress. (As a quantitative criterion, a debt security must not have experienced a decline of more than 20% of its market price, or an increase in haircut of more than

45 The “restricted-use committed liquidity facility” (RCLF) is provided in paragraph 54a of the BCBS LCR standard, as inserted by the BCBS in January 2014 (www.bis.org/publ/bcbs274.pdf). 46 Please refer to footnote 43.

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20 percentage points if it is used as collateral in a repo-style transaction, within any period of 30 calendar days during a “relevant period of significant liquidity stress” since the debt security was issued (where applicable), or in the absence of such a “relevant period of significant liquidity stress”, any such period of 30 calendar days since the debt security was issued); (iv) are not issued by a financial institution, or an associated entity of a financial institution, that is not a PSE bank; and (v) are not structured financial instruments or subordinated debt securities. (b) RMBS that comply with §8 and §9 of Part 3 of
Schedule 2 to the BLR. In particular, the
RMBS must have been approved by the MA to be included as level 2B assets by a category 1 institution. (Further guidance for the treatment of RMBS under the LCR (as well as the LMR) is provided in Annex 2.) (c) Listed ordinary shares 47 which (i) are not issued by a financial institution, or an associated entity of a financial institution; (ii) are listed and traded on a recognized exchange 48, and its trading is cleared by a central counterparty; (iii) are a constituent of Hang Seng Index;

47 For the avoidance of doubt, only listed ordinary shares can be included. Other listed securities and instruments such as listed preference shares, exchange-traded funds, depositary receipts, real estate investment trusts, and any other listed structured products and derivative products cannot be included as level 2B assets. 48 “Recognized exchange” has the meaning given in §2(1) of the BCR.

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MSCI Hong Kong Index; or a stock index specified by the relevant banking supervisory authority of a country where (A) the AI holding the share is incorporated in that country or carries on a banking business through a branch or subsidiary in that country 49; and (B) the supervisory authority’s liquidity requirements on level 2B assets are consistent with, and no less stringent than, the relevant requirements set out in the Basel III LCR document 50, 51; (iv) are denominated in HKD or in the local currency of the country in which the AI holding the share is incorporated or carries on a banking business through a branch or subsidiary; (v) are traded in large, deep and active markets, characterized by a low level of concentration, and where a share of that type can be monetized through direct sale or repo-style transactions. The HKMA expects that an AI should not include shares as level 2B assets in the following circumstances: (A) the trading of the shares has been suspended for 30 calendar days, or it has been announced that the shares will be removed from the stock index specified under (iii) above unless

49 For the avoidance of doubt, the eligible overseas ordinary shares listed in that country can also be booked in the institution’s Hong Kong office and recognized as level 2B asset if the Hong Kong office is the booking centre for the institution’s overseas exposures. 50 This refers to Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tool issued by the BCBS in January 2013. 51 If there is any ambiguity, the Basel standard will prevail. For example, if the relevant supervisory authority accepts any shares on a discretionary basis where the shares are not the constituent shares of the authority’s pre-defined “major stock index”, such shares will not be accepted as level 2B assets under the HKMA’s liquidity regime.

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46 under exceptional circumstances 52 ;or
(B) the shares of a company held by the AI exceed 1% of the total shares of that company readily available for trading in the market (i.e. free-floating shares 53) 54, 55; and (vi)have a proven record as a reliable source of liquidity in the markets even during a period of financial stress. As a quantitative criterion, the shares must not have experienced a decline of more than 40% of its market price, or an increase in haircut of more than 40 percentage points if it is used as collateral in a repo-style transaction, within any period of 30 calendar days during a “relevant period of significant liquidity stress” since the share was listed (where applicable), or in the absence of such a “relevant period of significant liquidity stress”, any such period of 30 calendar days since the share was listed.
5.5.3 A category 1 institution that includes any level 2B
assets in its HQLA must be particularly vigilant to the risks of holding such assets as a stock of liquidity. Appropriate systems and measures should be in place to support the institution’s monitoring and control over such risks.

52 For example, the removal of the listed company from the stock index is related to certain corporate actions (such as reorganization, mergers and acquisitions) and the company after corporate actions will continue to be included as another constituent of the stock index. 53 In general, free-floating shares exclude those held by strategic entities like government agents and holding companies. Institutions may rely on market information, such as those provided by exchanges, index providers and financial data vendors to determine the number of free-floating shares. 54 The portion of shares held by the AI within the 1% threshold could still be included as level 2B assets. 55 Criterion (B) is applicable to the calculation of LCR and LMR (but not under the NSFR or CFR). If the shares of a company held by an AI exceed 1% of the total free-floating shares of that company, the AI could still include all these shares as level 2B assets under the NSFR (or listed ordinary shares in item 5(ab) at Table 4 to Schedule 6 to the BLR under the CFR) provided that other qualifying criteria are met fully.

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5.6 Ceilings on level 2 assets
5.6.1 To avoid undue concentration on level 2 assets
(particularly level 2B assets) included in a category 1 institution’s HQLA, two ceilings are imposed as follows:
(a) Pursuant to rule 32(c), the sum of the total weighted amounts of a category 1 institution’s level 2A assets and level 2B assets must not exceed 40% of the total weighted amount of the institution’s HQLA (40% ceiling); and (b) Pursuant to rule 32(d), the total weighted amount of the institution’s level 2B assets must not exceed 15% of the total weighted amount of the institution’s HQLA (15% ceiling).
5.6.2 The application of these two ceilings may be distorted
by securities financing transactions which involve exchange of an asset with another asset, where both of these assets are qualified for inclusion as HQLA (or will be qualified upon receipt by a category 1 institution within the LCR period). 56 To avoid such potential distortions, a category 1 institution must determine the total weighted amount of HQLA by taking the following steps:
(a) Step 1 – the institution should follow the provisions of rule 33 and apply the formula it contains (Formula 1) to calculate the total weighted amount of HQLA without reversing any relevant securities financing transaction; (b) Step 2 – the institution should follow the provisions of rule 34(2)(a) and apply the formula to which it refers (Formula 2) to calculate the total weighted amount of HQLA

56 For example, by entering into a short-term transaction (i.e. maturing within 30 calendar days) in which a bank transfers out, say, level 2B assets and receives level 1 assets, the bank would be able to include the level 1 assets in its HQLA and have additional capacity for recognising more level 2 assets, hence making the two ceilings less binding upon it, if no adjustment is required.

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48 after reversal of all relevant securities financing transaction and make any necessary adjustment as required by the application of the two ceilings; and (c) Step 3 – the institution should follow rule 34(2)(b) to take the lower amount between the results as calculated under the first two steps to determine the total weighted amount of HQLA (subject to any other adjustment that may be required if a category 1 institution applies rules 37 and 38 in respect of the ALA – see subsection 5.7 below). 57
5.6.3 The mechanics for the calculation of the total weighted
amount of HQLA taking into account the 40% ceiling and 15% ceiling are incorporated in the standard templates provided in Part 2 of Return MA(BS)1E. A category 1 institution should put in place effective systems and procedures to identify those securities financing transactions which would need to be reversed under rule 34(2)(a) (as referred to in “Step 2” above), and use the standard templates for the calculation.
5.7 Alternative Liquidity Approach (ALA)
5.7.1 As mentioned in paragraph 5.2.9, a category 1
institution must, pursuant to rule 27(2)(c), manage the composition of its HQLA by currency so that the HQLA is broadly consistent with the distribution of the institution’s total net cash outflows by currency.
5.7.2 Recognising however that the supply of HKD￾denominated HQLA is not always sufficient to meet the
banking sector’s aggregate demand for holding such assets for liquidity purposes, one of the options from amongst the “Alternative Liquidity Approaches” provided by the BCBS, i.e. the use of foreign currency

57 To avoid doubt, transactions necessitating exchange of assets which are not both qualified for inclusion as HQLA do not need to be reversed for the purposes of operating the 40% ceiling and 15% ceiling.

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HQLA to cover domestic currency liquidity needs, has been adopted in the local framework.
5.7.3 Pursuant to rule 37, a category 1 institution may use
part of its foreign currency-denominated HQLA to
cover the institution’s “HKD LCR mismatch” 58 in the calculation of the LCR, subject to the conditions and requirements set out in rule 37 and rule 38.
5.7.4 Although a category 1 institution adopting the ALA is
not required to obtain the MA’s prior approval for doing so, it must be able to demonstrate, if requested by the MA, its compliance with all of the conditions and requirements set out in rule 37 and rule 38.
5.7.5 In particular, rule 37 provides that –
(a) a “rule 37 institution” must be able to demonstrate to the satisfaction of the MA that it has a genuine need to use foreign currency-denominated HQLA to cover HKD￾denominated total net cash outflows in order to maintain its LCR of not less than the minimum requirement set out in rule 4; 59 (b) the foreign currency-denominated HQLA used under rule 37 must be level 1 assets which have not yet been used by the institution to cover its foreign currency￾denominated total net cash outflows. In other words, an institution running a liquidity shortfall in a specific foreign currency must

58 As defined in rule 36, “HKD LCR mismatch”, in relation to the calculation by a category 1 institution of its LCR, means that portion of the institution’s HKD-denominated total net cash outflows that is not covered by its HKD-denominated HQLA. 59 The application of rule 37 by a category 1 institution should mainly be driven by the existence of a substantive shortfall in HQLA denominated in HKD (versus the institution’s HKD-denominated total net cash outflows) for the purposes of rule 27(2)(c), that cannot be easily or aptly addressed due to various practical issues (such as the difficulty for the institution to materially change the currency composition of its HQLA or liquidity risk profile within a short period of time, or to acquire enough HKD-denominated HQLA having regard to market circumstances, in order to reduce its level of currency mismatch under the LCR). This means that a category 1 institution should not make use of the provisions under rule 37 for the sole purpose of seeking profit.

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50 not use its level 1 assets denominated in that currency for ALA purposes; (c) in calculating its LCR, the institution must apply the foreign exchange haircuts required under rule 38 on the foreign currency￾denominated level 1 assets under rule 37 – please refer to paragraph 5.7.10 below; (d) the institution must always hold an amount of HKD-denominated level 1 assets that is not less than 20% of the institution’s HKD￾denominated total net cash outflows – please refer to paragraphs 5.7.6 to 5.7.9 below; and (e) the institution must be able to demonstrate to the satisfaction of the MA that it has the necessary systems and capacity to manage the level of foreign exchange risk associated with the use of such foreign currency￾denominated level 1 assets under rule 37.
5.7.6 Among these conditions as set out in rule 37, it is
particularly crucial for a category 1 institution to always maintain an amount of HKD-denominated level 1 assets not less than 20% of its HKD-denominated total net cash outflows. A category 1 institution’s failure to meet this condition will result in a “relevant liquidity event” (as specified in rule 14(3)(a)(iv)), in which case the institution must comply with the “prescribed notification requirement” (as provided in §97I of the BO) to notify the MA immediately.
5.7.7 Upon receipt of a notification of such an event, the MA
will enter into discussion with the institution to consider remedial actions. Among other relevant factors, the MA will assess whether the event is caused by any weakness in the institution’s internal controls and risk management systems, or by any systemic reasons or special market circumstances which are out of the institution’s control.
5.7.8 Depending on the actual circumstances, the MA may
consider allowing the institution to continue to adopt

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51 the ALA subject to certain conditions and necessary safeguards, such as – (a) requiring the institution to institute measures to meet the minimum 20% requirement, for example, by switching some foreign currency-denominated HQLA into HKD￾denominated HQLA, scaling down its liquidity risk exposures in HKD, or both, within an agreed timeframe; (b) through the exercise of the power under §97K(1) of the BO, setting a range of more prudent foreign exchange haircuts to be applied to the portion of the institution’s foreign currency-denominated level 1 assets for rule 37 purposes; and (c) imposing any other conditions that may be considered necessary and prudent by the MA in the circumstances of the case.
5.7.9 The 20% minimum holding level for HKD-denominated
level 1 assets by category 1 institutions is binding at all times, whether during or after the phase-in period. If, for example, the minimum LCR requirement is 100%, the level of foreign currency-denominated level 1 assets that can be used by a category 1 institution under rule 37 shall not exceed 80% (i.e. the difference between 100% and 20%) of the institution’s HKD￾denominated total net cash outflows.
5.7.10 As set out in rule 38, the foreign exchange haircuts
applicable to the foreign currency-denominated level 1 assets used under rule 37 are:
(a) 2% for assets denominated in USD;
60
(b) 8% for assets denominated in Euro,

60 The haircut of 2% is derived from the range of the Convertibility Undertaking (i.e. 7.75 to 7.85) under the Linked Exchange Rate System. The calculation is: (7.85 – 7.75) /7.8  1.3% (rounded up to 2%).

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Japanese yen or pound sterling;
61 62 and
(c) 10% for assets denominated in other foreign currencies that are freely and reliably convertible into HKD. 63
5.7.11 In line with the BCBS LCR standard, the above foreign
exchange haircuts are applicable only to the portion of foreign currency-denominated level 1 assets exceeding the threshold set out in rule 38(2), which is 25% of a rule 37 institution’s HKD-denominated total net cash outflows. The application of this threshold is intended to recognise that an institution may incur a certain extent of currency mismatch in the ordinary course of business operation.
5.7.12 The adjustments to a category 1 institution’s total
weighted amount of HQLA as a result of the application of such foreign exchange haircuts on such foreign currency-denominated level 1 assets can be derived by using the standard templates contained in
Part 2 of Return MA(BS)1E.
5.7.13 The MA will assess periodically (normally once every
five years) whether the adoption of the ALA in the local framework continues to be necessary.
5.8 Total net cash outflows
5.8.1 A category 1 institution must follow the rules provided
in Division 5 of Part 7 of the BLR to calculate its total net cash outflows, the LCR’s denominator. Specific

61 As elaborated in footnote 27 of the BCBS LCR standard, a “major currency” should exhibit significant and active market turnover in the global foreign currency market (e.g. the average market turnover of the currency as a percentage of the global foreign currency market turnover over a ten-year period is not lower than 10%). By reference to the Triennial Central Bank Survey of foreign exchange and derivatives market activity published by the Bank for International Settlements (BIS), other than the USD, only the Euro, Japanese yen and pound sterling can currently meet this criterion. The MA will review the scope of “major currencies” from time to time. 62 This level of haircut is in line with the minimum required level (8%) for HQLA denominated in “major currencies” under the ALA option prescribed in the BCBS LCR standard (paragraph 60). 63 Level 1 assets denominated in renminbi are subject to this level of haircut rate for the purposes of rule 37.

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53 guidance on the calculation of individual cash flow items is provided in the Code issued by the MA under §97M of the BO. Standard templates and the associated CIs are provided in Sections B and C of
Part 2 of Return MA(BS)1E to facilitate the calculation.
Certain items are highlighted below. 64
Retail deposits
5.8.2 Under the LCR, “retail deposits” taken by a category 1
institution are calibrated into “stable retail deposits”, “less stable retail deposits” and “retail term deposits”.
5.8.3 Category 1 institutions taking any retail deposits in
Hong Kong must follow the MA’s requirements in calculating the expected cash outflows arising from such domestic retail deposits.
5.8.4 Pursuant to rule 22(2), if a category 1 institution
incorporated in Hong Kong has any overseas banking operation (whether in the form of a branch or associated entity) that takes retail deposits in a host country outside Hong Kong, it must, for the purpose of calculating its LCR on an unconsolidated basis or consolidated basis covering the retail deposits taken by its operation in that country, adopt the requirements set by the relevant banking supervisory authority of the host country for such deposits. This necessitates the institution acquiring and maintaining sufficient knowledge of the relevant requirements in that host country, and having in place effective systems and procedures to enable the calculation of expected cash outflows arising from such deposits accordingly.
5.8.5 Rule 22(2) does not apply if –
(a) the relevant banking supervisory authority in the host country does not impose any liquidity requirement for the equivalent of an LCR; or

64 A category 1 institution may exclude “pledged deposits” (as defined in rule 2) from the calculation of its total net cash outflows subject to the conditions set out in rules 41(2), (3) and (4). Please also refer to the relevant guidance provided in the CIs for Return MA(BS)1E.

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(b) the authority, for the purposes of the calculation of the equivalent of an LCR insofar as the calculation relates to the retail deposits, does not adopt or apply those liquidity requirements to the institution’s operation in that country.
5.8.6 Pursuant to rule 22(4), if the MA is of the view that the
liquidity requirements in the host country relating to the treatment of retail deposits in the calculation of the LCR are less stringent than the associated requirements in Hong Kong, the MA may require a category 1 institution to apply the relevant requirements in Hong Kong to such deposits for calculating its LCR.
5.8.7 Stable retail deposit refers to a retail deposit taken by a
category 1 institution from a retail customer, where – (a) the deposit is fully insured by an “effective deposit insurance scheme”; and (b) the retail customer in respect of that deposit has at least 2 “other established relationships” with the institution, or the deposit is maintained by the retail customer in a “transactional account” at the institution.
5.8.8 As described in clause 3(1) of the Code, the expected
cash outflow arising from stable retail deposits is calculated by multiplying the principal amount of such deposits by an outflow rate of 5%.
5.8.9 The outflow rate for stable retail deposits can be
lowered to 3% as discussed in clause 3(2) of the Code, if this level is not inconsistent with the historical run-off behaviour of such deposits during a period of financial stress, and the effective deposit insurance scheme covering such deposits meets specified additional requirements, that is, the effective deposit insurance scheme – (a) is based on a system of prefunding through periodic collection of levies on the members

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55 of the scheme;
(b) has an adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, based on an explicit and legally binding guarantee from the relevant government, a standing authority to borrow from the government, or any other similar arrangement; and (c) is ordinarily capable of making a payment to depositors in respect of their insured deposits within not more than 7 working days after the scheme is activated.
5.8.10 In Hong Kong, the Deposit Protection Scheme (DPS) is
considered by the MA as an “effective deposit insurance scheme”. Subject to the satisfaction of the requirements 65 that may be applicable to a member of the DPS, a category 1 institution may apply an outflow rate of 3% to calculate its expected cash outflows arising from stable retail deposits. This does not, however, preclude the possibility that the MA may require an institution to adopt an outflow rate of 5% pursuant to clause 3(1) for the calculation, if the MA is of the view that the additional requirements in respect of the effective protection scheme described in paragraph
5.8.9 above are not met fully by virtue of any deficiency
in respect of the institution. It is therefore imperative for a category 1 institution to have in place and maintain effective systems and procedures to ensure compliance with all requirements that may need to be fulfilled by it to facilitate the smooth operation of the DPS.
5.8.11 Moreover, the MA may exercise the power under
§97K(1) of the BO to vary the level of outflow rate required currently under rule 41(9) (or rule 41(10) as the case may apply), if he is of the view that the

65 For example, a category 1 institution (as a member of the DPS) should have the capacity to provide information promptly to the Hong Kong Deposit Protection Board as and when required in order to facilitate the effective operation of the DPS, including a prompt payment to depositors within 7 working days after activation of the Scheme, as mentioned in clause 3(2)(c) of the Code.

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56 existing level is inconsistent with the historical run-off behaviour of such deposits as observed in the local banking sector or any particular institution(s) during a period of financial stress.
5.8.12 Retail term deposit means a retail deposit that has a
remaining term to maturity, or a withdrawal notice period, greater than the LCR period, and in respect of which– (a) the retail customer has no legal right to withdraw the deposit within the LCR period; 66 or (b) any early withdrawal of the deposit will result in the retail customer being charged a significant penalty that is materially greater than the loss of interest that may arise from the early withdrawal.
5.8.13 The MA expects a category 1 institution to develop its
own internal methodology for determining whether a term deposit taken from a retail customer by the institution could be treated as a “retail term deposit” for LCR purposes. Upon request by the MA, the category 1 institution should be able to demonstrate that its policy and practice (including the level of early withdrawal penalty charged by it) can effectively reduce the risk of early withdrawal of retail term deposits by its retail customers. Where appropriate, the reasonableness of the institution’s policy and practice in respect of the charging of penalties on early withdrawal of term deposits may be assessed by reference to historical data of the institution relating to early withdrawn deposits in normal or stressed situations.

66 Pursuant to §12(3) of the BO, a DTC shall not, without the written permission of the MA, repay any deposit within a period of less than three months (as specified in the First Schedule to the BO) from the date on which the deposit was taken by the DTC. If a retail term deposit is taken by a DTC which is a category 1 institution or a member within a category 1 institution’s consolidated group, that deposit should be treated according to Annex 4 of the CIs for Return MA(BS)1E for LCR purposes.

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5.8.14 Where appropriate, the MA may compare the level of
early withdrawal penalty charged by a category 1 institution with those of other AIs. Depending on the actual circumstances, the MA may use a common benchmark to facilitate comparison of the relevant policies and levels of early withdrawal penalty adopted by different institutions. The level of such a benchmark, if used by the MA, would be determined according to prevailing market circumstances. 67
5.8.15 Under the BCBS LCR standard, the outflow rate for
less stable retail deposits 68 should not be less than 10%. National supervisors are expected to develop as necessary additional buckets of less stable retail deposits to which the application of higher outflow rates may be warranted, taking into account the specific attributes of such deposits.
5.8.16 Currently, less stable retail deposits taken by category
1 institutions are subject to a standard outflow rate of 10% for LCR purposes. The MA will continue to evaluate whether there is sufficient evidence to justify a more differentiated treatment for such deposits. If the MA considers it prudent and reasonable to increase the outflow rate beyond the current level of 10% for such deposits, the MA may do so through exercising the power under §97K(1) of the BO, or by making amendments to the BLR and associated documents (including the Code and Return MA(BS)1E).

67 In line with the BCBS LCR standard (paragraph 82), the MA may set this benchmark as a certain multiple of the interest accrued on a term deposit, where such accrued interest can be viewed as a “loss” to be borne by the depositor as a result of early withdrawal. The level of the multiplier may be determined from time to time according to the interest rate environment. Under a very low interest rate environment, this multiplier may be set on the high side. For example, a multiplier at 200% would mean that the MA would not normally regard an early withdrawal penalty set by a category 1 institution as “significant” for LCR purposes if the penalty is less than 200% the interest accrued on the term deposits concerned, unless the institution concerned can demonstrate to the MA’s satisfaction that there are adequate justifications for the level of penalty otherwise set by the institution. 68 As defined under rule 39, a less stable retail deposit refers to a retail deposit taken by a category 1 institution that is not a stable retail deposit or retail term deposit.

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Small business funding
5.8.17 Under the LCR, “small business funding” received by a
category 1 institution from “small business customers” is treated in a manner akin to retail deposits. The requirements in respect of retail deposits, including the guidelines set out in paragraphs 5.8.2 to 5.8.16 above, are applicable to small business funding.
5.8.18 A category 1 institution should note that, as provided in
rule 39, the amount of small business funding received from a single small business customer (or a group of related customers) must be less than HK$10 million (or the equivalent in another currency).
5.8.19 In determining whether the unsecured funding
provided by a corporate (or a group of related corporates) can be treated as small business funding, a category 1 institution must ensure that either one of the following criteria is satisfied:
(a) if the institution has a credit exposure to the corporate (or a group of related corporates), the exposure meets the criteria for the IRB subclass of small business retail exposures under §144 of the BCR 69; or (b) if the institution has no credit exposure to the corporate (or a group of related corporates), the funding received from the corporate (or a group of related corporates) is managed by the institution as if it were a retail deposit. 70 Operational deposits
5.8.20 “Operational deposit” refers to a deposit placed by a
wholesale customer (other than a small business customer) with a category 1 institution in the course of

69 This criterion is applicable irrespective of whether the category 1 institution is adopting the IRB approach for regulatory capital purposes. 70 For example, the pricing policy in respect of the funding received from the customer should be comparable to that for general retail customers.

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59 the institution providing to that customer “operational services” (i.e. clearing, custodial-related or cash management services), on which the customer has become significantly dependent for its business operation, and that deposit does not arise from the institution’s provision of correspondent banking services or prime brokerage services to the customer. Generally, operational deposits are expected to be maintained in an operational deposit account the operation of which is subject to a legally binding agreement demonstrating that the institution provides operational services to the customer through that account. (a) As explained in clause 7(1) of the Code, the expected cash outflows arising from operational deposits are calculated by applying – (i) in the case of that portion of an operational deposit that is fully insured by an effective deposit insurance scheme, the outflow rate that is applicable to stable retail deposits; and (ii) in any other case, an outflow rate of 25%. (b) Such preferential treatment is only available to those operational deposits in respect of which the conditions set out in clause 7(2) of the Code are satisfied fully. In particular, subparagraph (h) under that clause refers to a category 1 institution having an effective methodology for identifying the amount of excess operational deposit maintained in a customer’s operational deposit account, having regard to all relevant factors affecting the risk of withdrawal by the customer of the excess operational deposit if the institution were to be in financial stress. (c) In view of the diversity of business nature and customer profile across category 1 institutions, individual institutions may

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60 develop their own internal methodologies 71 for determining the amount of operational deposits and excess operational deposits, in accordance with the following guiding principles:
(i) the relevant system and methodology should be sufficient to facilitate ongoing assessment of the eligibility of deposits to be included by a category 1 institution as operational deposits. (See clause 7(4) of the Code.) The frequency and level of sophistication of this type of assessment should be commensurate with the institution’s liquidity risk profile; 72 (ii) the assessment should be conducted in a sufficiently granular manner, taking into account relevant factors that may affect the risk of withdrawal of operational deposits, particularly in times of stress. The relevant factors may include (but are not limited to) a customer’s business relationships with the institution, the extent to which the

71 For example, some category 1 institutions may adopt statistical methodologies to assess the stability of deposits in “operational deposit accounts”. On top of such statistical approaches, institutions may also apply internal limits (for example, by reference to the average deposit balance maintained in operational deposit accounts covering a certain period of time) to restrict the amount of deposits in those accounts that can be included as operational deposits for LCR calculation purposes. Such approaches may be adopted by category 1 institutions as building blocks for developing their internal systems and methodologies for identifying excess operational deposits, on the premise that the relevant details (such as the underlying assumptions and parameters) specified by the institutions are commensurate with, and suitable for, their actual circumstances and business profile. 72 In general, such assessments should be conducted at least monthly or more frequently as appropriate. For example, if a category 1 institution consistently reports a considerable amount of deposits as “operational deposits” (say, exceeding 5% of the institution’s total unweighted amount of expected cash outflows), there may be a case for the institution to conduct this type of assessment more frequently (say, more than once a month). Category 1 institutions may, where appropriate, adopt other criteria (such as the contractual terms of operational services provided, customer profiles and anticipated changes of these factors) for triggering more frequent assessments. In any case, a category 1 institution should have adequate systems and procedures in place to cater for the possibility that it may be requested by the MA to conduct this type of assessment more frequently as and when necessary.

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61 customer has relied on the institution’s operational services, and the historical trend of deposit balances placed with the institution (taking into account, for example, the absolute level and volatility of deposit balances); and (iii) the assessment should ensure that deposits and other funding that are apparently not qualified for being regarded as operational deposits are fully identified and carved out. 73 (d) As provided in clause 7(3) of the Code, if a category 1 institution is unable to determine the amount of excess operational deposit in a customer’s operational deposit account, the entire balance of the deposit in that account is to be treated as if the deposit were not an operational deposit. (e) The MA may disallow a category 1 institution from applying the outflow treatment available to “operational deposits” to all or any part of its operational deposits, if the MA is of the view that those deposits do not qualify as operational deposits based on any failure to meet any of the conditions set out in clause 7(2) of the Code. Potential drawdown of undrawn committed facilities
5.8.21 A category 1 institution should calculate the expected
cash outflows arising from potential drawdown of loans on undrawn, committed facilities (whether credit facilities or liquidity facilities) within the LCR period

73 Deposits and funding that should not be regarded as operational deposits include (but are not limited to), for example: (i) deposits and funding which are not received in the course of the provision of operational services by a category 1 institution; (ii) deposits and funding which are taken from retail customers and small business customers, or received in the course of correspondent banking and prime brokerage activities; and (iii) deposits and funding earning a level of interest (or coupled with other benefits) that is or are preferential when compared to the institution’s interest rates or benefits normally offered to general customers.

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62 according to clause 21 of the Code. The calculation of this expected cash outflow item covers all undrawn portions of committed loan facilities which are “irrevocable” by a category 1 institution.
5.8.22 As a general principle for determining the liquidity
requirements (whether under the LCR, LMR, NSFR or CFR) in respect of committed facilities granted by an AI to its customers, the MA expects that an AI should not only have regard to the contractual terms of that facility (in particular, the presence of “protective” clauses to the effect that a facility is “unconditionally revocable”) but should assess whether from a customer relationship, reputational, franchise or other perspective it is genuinely and credibly open to the AI, at any time, to revoke the facility unilaterally. In other words, the inclusion of a protective legal clause should not, per se, be regarded as a sufficient ground for an AI to treat its commitment under a facility as a “revocable” commitment requiring no liquidity resource. 74 An AI should therefore calculate an applicable statutory liquidity ratio on the basis of a genuine and reasonable assessment of the extent to which drawdown can be refused and undrawn amounts under facilities cancelled or revoked, reflecting not merely that the facilities contain protective legal clauses but also other relevant considerations as outlined above. 75

74 In practice, unless there are specific issues relating to particular customers (e.g. adverse developments in respect of credit standing or financial strength), it may not generally be feasible for an AI to prohibit its customers, unaffected by such issues, from utilizing their facilities without inducing customer disputes or adverse publicity with negative reputation implications for the AI. Further, given that the granting of facilities has a potential liquidity impact on the AI (whenever the facilities are drawn by the customers concerned), it is reasonable to expect that the AI should reserve a certain level of liquidity to cater for the potential liquidity needs arising from the facilities that have not been drawn. In this regard, the BCBS liquidity standards have prescribed treatments for such facilities. (Please refer to paragraph 131 of the LCR standard and paragraph 47 of the NSFR standard.) 75 For instance, after making the necessary assessment, an AI may consider that, say, 20% of the undrawn amounts under a given facility or type of facility cannot be credibly cancelled, notwithstanding the presence of protective legal clauses in the facility documents. It should therefore treat that part of the undrawn facility amounts that may not be cancellable in practice as “committed”. If necessary, the AI may be requested to provide information about the extent to which their facility commitments are assessed by them to be credibly cancellable, and where the circumstances warrant,

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5.8.23 For calculating the LCR, an outflow rate of 0% can be
applied only to those loan facilities (whether credit facilities or liquidity facilities) which are, as assessed by a category 1 institution, uncommitted facilities that can be genuinely and credibly revoked by the institution unconditionally.
5.8.24 Certain types of facility granted by a category 1
institution are not included in the calculation of this expected cash outflow item, including – (a) facilities that are not loan facilities; 76 (b) liquidity facilities granted by an institution to support a structured financing transaction, to the extent that the expected cash outflows arising from the structured financing transaction have been included in the calculation of the institution’s LCR according

the MA may through its regular supervisory work review the reasonableness of such assessments. In any case where the reasonableness of the assessment is in doubt, the AI will be expected to enhance the relevant methodology used and recalculate the applicable statutory liquidity ratio(s) accordingly if needed. 76 For example, some types of facility may only oblige an institution to issue letters of credit or guarantees or to incur other similar types of contingent funding obligations. In these circumstances, the unused portions of such facilities do not need to be included in the calculation of expected cash outflows under clause 21 of the Code. However, if the institution has incurred any contingent funding obligations as a result of the use of such facilities by its customers, such obligations should be included in the calculation of expected cash outflows under clause 23 of the Code. Please refer to paragraphs 5.8.27 and 5.8.28. In the case of a facility (such as a trade financing facility) granted by a category 1 institution, whereby the facility may impose upon the institution a loan commitment and various types of contingent funding obligations, the expected cash outflows arising from the facility should be calculated in the following manner:
 If the institution’s customer can draw loan on the facility up to a certain amount, and the loan commitment is “irrevocable” as reasonably assessed by the institution, the unused portion of the facility should be included in the calculation of expected cash outflows arising from potential drawdown of loan on that facility under clause 21 of the Code.  If the institution has issued a letter of credit, guarantee or similar document in favour of its customer under the facility, and hence incurred a trade-related contingency or any other contingent funding obligation falling within clause 23 of the Code, the trade-related contingency or contingent funding obligation should be included in the calculation of the expected cash outflows under that clause. For the calculation of expected cash outflows in these circumstances, please refer to the CIs provided for items B19 to B21 in Part 2 of Return MA(BS)1E.

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64 to clause 19 or 20 of the Code – please refer to clause 21(7) of the Code; and (c) facilities which only allow drawing of intraday liquidity (noting that the LCR does not capture intraday liquidity risks).
5.8.25 To avoid doubt, a customer’s drawdowns on any
committed facilities or uncommitted facilities within the LCR period, if already approved by the institution, should be included in the calculation of expected cash outflows under clause 22 (instead of clause 21) of the Code.
5.8.26 If a committed facility granted by a category 1
institution to its customer is collateralised by an asset that satisfies all the requirements set out in rule 25 for inclusion in the institution’s HQLA but that asset has not been so included, the institution may, subject to the conditions set out in clause 21(2) of the Code, deduct the fair value of the asset (after applying the required haircut for the particular class of HQLA to which the asset belongs) from the principal amount of the facility commitment. Contingent funding obligations
5.8.27 Under clause 23 of the Code, a category 1 institution
should calculate the expected cash outflows arising from the following types of contingent funding obligations:
(a) trade-related contingencies;
(b) guarantees and letters of credit unrelated to trade-related contingencies; (c) uncommitted facilities; and (d) non-contractual contingent funding obligations arising from those specific scenarios described in item 4 of Table 4 in clause 23 of the Code.

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5.8.28 A category 1 institution should apply the outflow rates
with respect to the relevant types of contingent funding obligations as specified in Table 4 under clause 23 of the Code.
5.8.29 In particular, a preferential outflow rate of 3% (as set
out in Table 4 of clause 23 of the Code) is applicable to trade-related contingencies exclusively. A category 1 institution should have the required capacity to distinguish between (i) trade-related contingencies and (ii) other guarantees and letters of credit (unrelated to trade-related contingencies) issued by it.
5.8.30 Non-contractual contingent funding obligations will
need to be included by a category 1 institution in the calculation of its LCR when there is a reasonable expectation that any of such obligations will materialise within 30 calendar days. In these circumstances, the institution should apply the outflow rates specified in
Table 4 under clause 23, or notify the MA as soon as
practicable in order to reach an agreement on the methodology for determining the amount of expected cash outflow arising from specific types of such non￾contractual funding obligations.
5.9 Monetization of HQLA under financial stress
5.9.1 As mentioned in paragraphs 3.1.2 and 3.1.3, a
category 1 institution is required to comply with the minimum LCR requirement set out in rule 4(1) or (2) at all times, unless the institution is undergoing significant financial stress and its financial circumstances are such as described in rule 6 and hence it may apply rule 4(3) and monetize its HQLA to meet its financial obligations. This provision serves the objective of the BCBS LCR standard that banks should maintain an adequate amount of HQLA which can be monetized in the event of liquidity stress.
5.9.2 The monetization of HQLA by category 1 institutions
according to rule 6 is allowed only when –
(a) the institution’s financial circumstances are such that, in order to meet its financial

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66 obligations as they fall due, it has to monetize its HQLA to the extent necessary to meet those obligations; and (b) the institution has no reasonable alternative other than to monetize its HQLA in such financial circumstances, notwithstanding that doing this will cause the institution’s LCR fall to a level less than as required under rule 4(1) or (2) (where applicable).
5.9.3 As mentioned in paragraph 3.4.3, a category 1
institution which is taking, or is about to take, action to monetize its HQLA under rule 6 must immediately notify the MA of this “relevant liquidity event” (as specified in rule 14(3)(a)(ii)) and provide the MA with relevant information about the event.
5.9.4 Upon receipt of such a notification from a category 1
institution, the MA will assess the situation and enter into discussion with the institution in order to consider appropriate supervisory responses. In determining its supervisory responses, the MA will have regard to the guiding principles set out in paragraph 18 of the BCBS LCR standard as well as the actual circumstances of each case. Major factors for consideration include, but are not limited to – (a) contributing factors and the seriousness of the event; (b) nature of the financial stress (e.g. idiosyncratic or market-wide) which the institution is encountering; (c) state of affairs of the institution and its risk management systems and profile; (d) viability of the institution’s contingency funding plan, including the availability of contingent funding sources or measures to address the situation; and (e) potential contagion effects to the financial

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67 system and possible implications for the availability of credit and market liquidity.
5.9.5 Depending on the actual circumstances, the MA may
require the institution to comply with certain conditions to be determined by the MA pursuant to rule 16(1), so that timely and suitable measures will be taken by the institution to improve its liquidity position within a reasonable timeframe. Such conditions may include (but are not limited to) any or a combination of the following:
(a) maintenance by the institution of an LCR of not less than a level specified by the MA; (b) submission by the institution to the MA of a plan to restore the institution’s LCR to a level normally required under rule 4(1) or (2) within a reasonable period as specified in the notice; (c) reduction by the institution of its liquidity risk exposures, or adoption of any other measures specified in the MA’s notice in order to avoid further deterioration of the institution’s liquidity position; and (d) enhanced reporting by the institution to the MA of its LCR position and any other information that may be specified by the MA, in order to enable close supervisory monitoring of the institution’s liquidity situation.
5.9.6 Alternatively, the MA may consider taking the
measures mentioned in paragraph 3.4.4 above if the following circumstances are established:
(a) the relevant liquidity event occurring in respect of a category 1 institution is not due

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68 to the circumstances specified in rule 6; 77 (b) an event specified in rule 14(3)(a)(iii) has occurred – please refer to paragraph 3.4.3(a)(iii) above; or (c) the MA is of the view that such actions as are mentioned in paragraph 3.4.4 are necessary to safeguard the general stability of the banking system and the interests of depositors (including potential depositors).
6. Application of LMR
6.1 Structure of LMR
6.1.1 The minimum LMR requirement provided in rule 7 is
applicable to a category 2 institution on an average basis covering a calendar month. The average LMR has two components:
(a) The numerator is the sum of net weighted amounts 78 of “liquefiable assets”, as determined in accordance with rule 48(3), for each working day of a calendar month. (b) The denominator is the sum of net weighted amounts of qualifying liabilities (after deductions), as determined in accordance with rule 48(4), for each working day of a calendar month. The total net weighted amount of deductible items must not be more than 75% of the total net weighted amount of qualifying liabilities before any deduction.
6.1.2 Pursuant to rule 48(2), the MA may permit a category 2
institution to calculate its average LMR by reference to

77 For example, the event may have been caused by the institution’s mis-management, or deficiencies in its internal controls or operating procedures. 78 The net weighted amount of a liquefiable asset, qualifying liability or an item deductible from such asset or liability is calculated by multiplying the principal amount of that asset, liability or deductible item by a “liquidity conversion factor” specified in Schedule 5 to the BLR.

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69 such days during a month as specified by the MA (instead of covering each working day of a month). 79
6.1.3 A category 2 institution should use the standard
templates provided in Part 3 of Return MA(BS)1E and follow the associated CIs to calculate the net weighted amounts of liquefiable assets and qualifying liabilities (including the deductible items).
6.2 Liquefiable assets
6.2.1 As provided under rule 49, only those types of asset
specified in Table A in §2 of Schedule 5 to the BLR can be included by a category 2 institution as liquefiable assets. These assets include:
(a) currency notes and coins;
(b) gold bullion;
(c) claims on, or reserves maintained with, the MA or central banks that are repayable to a category 2 institution, overnight, on demand, or on notice which expires on the first day of the LMR period (i.e. within 24 hours from the date at which the LMR is calculated); (d) net due from banks, subject to the condition that the weighted amount must not exceed 40% of the total weighted amount of a category 2 institution’s qualifying liabilities (before deductions); (e) export bills; (f) marketable debt securities or prescribed instruments meeting the relevant criteria;

79 Notwithstanding this possible permission, a category 2 institution should manage its liquidity position on a daily basis with a view to maintaining a stable trend in its LMR position in compliance with the minimum requirement. A category 2 institution should avoid bearing undue liquidity risk and “window dressing” it only on such days specified by the MA under rule 48(2).

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(g) listed ordinary shares meeting the relevant criteria – please refer to subparagraph 5.5.2(c) for further guidance; and (h) residential mortgage loans in respect of which The Hong Kong Mortgage Corporation Limited has issued an irrevocable commitment to purchase which is approved by the MA.
6.2.2 A category 2 institution must not include any asset in
its stock of liquefiable assets unless the following criteria (as provided in rule 49(2)) are satisfied:
(a) the asset must be readily monetizable, whether by way of outright sale or being used as collateral for secured funding purposes; (b) the asset must not be overdue or in default; (c) the asset must be free from encumbrances and there must be no regulatory, legal, contractual or other restrictions that inhibit the category 2 institution from liquidating, selling, transferring or assigning the asset. In this regard, the guidance provided in Annex 1 is also applicable for category 2 institutions to assess whether an asset is “free from encumbrances”; (d) the value of the asset must be readily identifiable and measurable. In this regard, paragraph 5.2.3(b) above is also applicable for the purpose of identifying liquefiable assets under the LMR; (e) the asset must be freely transferable and available to the category 2 institution and must not be subject to any liquidity transfer

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71 restriction; 80
(f) the asset must not be a subordinated debt security; (g) if the asset is a structured financial instrument, the structure of the instrument must be simple and standardised; and (h) the asset must be denominated in HKD or in a currency freely convertible into HKD. In this regard, footnote 28 is applicable, with all necessary modifications, for the assessment of an asset against this criterion for LMR purposes.
6.2.3 In respect of marketable debt securities, a category 2
institution must not include RMBS in its liquefiable assets unless such inclusion is approved by the MA under rule 49(4). Please refer to the guidance provided in Annex 2 with respect to the consideration of RMBS for LMR purposes.
6.2.4 As set out in Table B of Schedule 5 to the BLR, any
debt security or prescribed instrument with a remaining term to maturity of not more than one month issued by a category 2 institution must be deducted from the institution’s liquefiable assets, unless otherwise exempted by the MA.
6.2.5 A category 2 institution must have in place and
maintain adequate systems and procedures for the on-

80 In this regard, paragraph 5.2.6(e) is also applicable, with all necessary modifications, for a category 2 institution to assess an asset against this criterion for LMR purposes. This means that the asset concerned must be freely transferable and available to a category 2 institution, whether between its Hong Kong office and any of its overseas branches and specified associated entities (where applicable), and the asset is not subject to any liquidity transfer restriction. Moreover, as provided in rule 49(3), if one or more assets held by a category 2 institution’s consolidated group member are subject to liquidity transfer restriction, such assets must not be included in the institution’s liquefiable assets for the calculation of its LMR, except to the extent that the qualifying liabilities (after deductions) of the member are also included in the calculation of the institution’s LMR, and the assets so included satisfy all other relevant requirements in rules 49(1) and 49(2). (Please refer to the illustrative example provided in the CIs for Return MA(BS)1E.)

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72 going assessment and management of its liquefiable assets to ensure compliance with the relevant qualifying criteria. If an asset included in a category 2 institution’s liquefiable assets ceases to satisfy any qualifying criterion that is applicable to the asset, the institution must exclude the asset from its stock of liquefiable assets as soon as practicable. 81
6.2.6 If a category 2 institution seeks to include listed
ordinary shares and triple-B debt securities as liquefiable assets, the HKMA would expect the institution, in managing funding diversification 82 , to set an appropriate limit on these two asset classes to avoid undue concentration on holding. 83
6.2.7 If warranted by the actual circumstances, the MA may
exercise the power under rule 51 (or rule 52) to require all category 2 institutions (or individual institutions) not to include an asset or a class of assets as liquefiable assets, with effect from the date or the occurrence of an event specified in a notice issued by the MA under that rule. 84
6.3 Qualifying liabilities
6.3.1 Qualifying liabilities include all one-month liabilities of a
category 2 institution except those liabilities specified in paragraph 6.3.4. As specified in Table C in §2 of

81 In practice, any asset that ceases to be eligible for inclusion in a category 2 institution’s stock of liquefiable assets should be excluded from the stock starting from the first working day (or, if rule 48(2) applies to the institution, the forthcoming day specified by the MA) immediately following the date of cesser. 82 Please refer to section 7.2 of the SPM module LM-2 “Sound Systems and Controls for Liquidity Risk Management” for details. 83 For example, if a category 2 institution has maintained its LMR close to the statutory minimum (such as 30% or lower), the total weighted amount of listed ordinary shares and triple-B debt securities (i.e. after applying the 50% liquidity conversion factor) should not be more than 10% of the total weighted amount of liquefiable assets. In any case, these two asset classes should not constitute a major portion of a category 2 institution’s liquefiable assets even though its LMR may not be close to statutory minimum. 84 Where necessary, the MA will apply rule 51 (or rule 52) for LMR purposes in a manner similar to the modality of applying rule 29 (or rule 30) for LCR purposes. Paragraph 5.2.8 of this module is also applicable, with all necessary modifications, for LMR purposes.

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Schedule 5 to the BLR, qualifying liabilities are
calibrated broadly into the following categories:
(a) total one-month liabilities of a category 2 institution to the MA or central banks; (b) if a category 2 institution’s total one-month liabilities to banks exceed the total one-month liabilities of banks to the institution, the amount of its total one-month liabilities to banks; and (c) other one-month liabilities.
6.3.2 As defined in rule 43, “one-month liability”, in relation
to a category 2 institution or its customer, means – (a) any liability, other than a contingent liability, the effect of which will or could be to reduce within 1 month the liquefiable assets of the institution or its customer; and (b) any contingent liability that, in the opinion of the MA, may result in a reduction within 1 month of the liquefiable assets of the institution or its customer.
6.3.3 A category 2 institution’s commitment under a facility
granted to its customer should be included in the calculation of the institution’s qualifying liabilities for LMR purposes, if – (a) the commitment is “irrevocable” as assessed by the institution on reasonable grounds (please refer to paragraph 5.8.22 which is equally applicable for LMR purposes); and (b) either one of the following conditions is met – (i) the date for the institution to fulfil the commitment is known to fall within the LMR period, or (ii) the commitment must be fulfilled by

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74 the institution on demand or subject to a notice period that will expire within the LMR period (unless there is evidence that any condition attached to the institution’s commitment will not be realised within the LMR period 85).
6.3.4 However, a category 2 institution does not need to
include the following types of liabilities and obligations for calculating its qualifying liabilities:
(a) pledged deposits;
(b) loan commitments arising from overdraft facilities, credit card facilities and any other facilities that are genuinely and credibly revocable unconditionally by the institution; (c) trade-related contingencies; (d) contingent liabilities arising from derivatives contracts; 86 and (e) non-contractual funding obligations, unless such obligations have materialised and a category 2 institution is liable to make payment under the obligation on demand or within the LMR period.
6.4 Deductions from qualifying liabilities
6.4.1 As set out in Table D in §2 of Schedule 5 to the BLR,
the following types of cash inflow can be deducted from a category 2 institution’s qualifying liabilities:
(a) total one-month liabilities of the MA or central banks to a category 2 institution (other than

85 For example, these conditions may include the execution of security document and the completion of a certain phase of a project. 86 To avoid doubt, this does not include a category 2 institution’s contractual liabilities under a derivative contract, where such contractual liabilities have materialised and therefore the institution will need to make a contractual payment within the LMR period.

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75 the amount included as liquefiable assets); (b) if a category 2 institution’s total one-month liabilities to banks exceed the total one-month liabilities of banks to the institution, the amount of the total one-month liabilities of banks to it; (c) the weighted amount, if any, of a category 2 institution’s net due from banks exceeding the 40% cap referred to in rule 48(7); and (d) eligible loan repayments.
6.4.2 The deduction of any cash inflow item from the
qualifying liabilities of a category 2 institution is subject to the conditions that the cash inflow – (a) is expected to be received by the institution within 1 month; 87 (b) arises from assets (whether on-balance sheet assets or off-balance sheet assets) that are fully performing and in respect of which the institution has no reason to expect a default within 1 month; and (c) the amount and timing for the institution to receive the cash inflow concerned are ascertained, and hence not contingent in nature.
6.4.3 A category 2 institution must have in place and maintain
adequate systems and procedures for determining the net weighted amounts of cash inflow items that can be deducted from the institution’s qualifying liabilities. If an inflow item does not (or ceases to) satisfy any qualifying

87 As provided in rule 53(3)(a), for the purpose of this condition, a category 2 institution must assume that a cash inflow is received by the institution at the latest possible date based on contractual rights available to the institution’s customers. For example, if the institution’s customer has an option to defer a payment to the institution beyond the LMR period, that payment cannot be regarded as an eligible cash inflow item for deduction from the institution’s qualifying liabilities.

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76 criterion set out in paragraph 6.4.2 that is applicable to that item, the institution must not deduct that inflow item from its qualifying liabilities or must cease to do so without undue delay. 6A. Application of NSFR 6A.1 Structure of NSFR 6A.1.1 The NSFR has two components:
(a) The numerator is the ASF, which is calculated as the total weighted amount of a category 1 institution’s on-balance sheet liabilities (including capital) that represent the sources of stable funding for the institution. (b) The denominator is the RSF, which is calculated as the total weighted amount of a category 1 institution’s on-balance sheet assets, off-balance sheet obligations and total derivative liabilities (before adjustment) that need to be financed with stable funding to different extents. 6A.1.2 The ASF and RSF items and the applicable factors are specified in Table 1 and Table 2 of Schedule 6 to the BLR. Detailed requirements relating to the calculation of ASF and RSF are provided in the CIs for Part 2 of Return MA(BS)26. 6A.1.3 Pursuant to rule 66 (or rule 67), the MA may require all category 1 institutions (or a particular category 1 institution) to exclude any capital or liability (or a class of capital or liabilities) from the calculation of the ASF if the MA is satisfied that the capital or liability is not (or is no longer) a sufficiently reliable source of liquidity for inclusion as ASF. These rules will operate in a manner similar to rules 29 and 30 for the LCR. (Please refer to paragraph 5.2.8.) 6A.2 Interdependent assets and liabilities 6A.2.1 The Basel NSFR standard allows national discretion for

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77 exceptional recognition of a pair of asset and liability as “interdependent”, hence assigning a weighted amount of $0 to the asset and liability. This discretionary treatment is subject to a set of stringent conditions. 88 6A.2.2 Pursuant to rule 69, a category 1 institution that is a note-issuing bank may recognise the Certificate of Indebtedness held and the legal tender notes issued by the institution as “interdependent”. 6A.2.3 As regards other assets and liabilities, the MA does not expect that there will be a material amount that can fully satisfy the specified criteria. A category 1 institution seeking to recognise any other pair of asset or liability as “interdependent” must apply for the MA’s exceptional permission under rule 70. 6A.2.4 The MA will not grant the permission unless the MA is satisfied that the conditions specified in rule 70(2) are met fully. In making the decision, the MA will also consider whether perverse incentives and unintended consequences may arise. For example, the MA will not grant permission if it is of the view that the asset and liability pair is structured with the primary objective to circumvent the NSFR requirement, or if the asset and liability pair poses significant liquidity risk to the institution. In particular, the permission will not be granted to derivative assets and derivative liabilities. 6A.2.5 A category 1 institution should discuss its case with the

88 As set out in rule 70(2), the conditions are:
(a) the asset and liability are clearly identifiable; (b) the asset and liability have the same principal amount; (c) the liability cannot fall due while the asset remains on the balance sheet; (d) the terms to maturity (if any) of the asset and liability are the same; (e) the institution acts solely as a pass-through unit to channel the funds received arising from the taking up of the liability to finance the acquisition of the asset only, and – (f) the institution’s customer in respect of the asset is not the institution’s customer in respect of the liability. (i) the funds cannot be used to fund other assets; and (ii) the cash flows in relation to the asset’s principal payment cannot be used other than to repay the liability; and (g) the institution’s customer in respect of the asset is not the institution’s customer in respect of the liability.

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MA before submitting any application under rule 70. If the MA considers that there may be a case for treating the asset and liability pair as interdependent, the institution will be asked to submit a formal application, supplemented with a comprehensive assessment conducted by an independent function (preferably the compliance function) of the institution to demonstrate that the criteria set out in rule 70(2) are satisfied fully. 6A.3 Self-rectification of NSFR shortfall 6A.3.1 The NSFR is a standard to address funding risk over a longer period. While the minimum NSFR is prescribed as 100% in rule 8A, a category 1 institution having a temporary immaterial NSFR shortfall may not practically imply that it is having an imminent liquidity problem. Therefore rule 8B allows category 1 institutions to self￾rectify temporary immaterial NSFR shortfall subject to specified conditions. This would help mitigating reputational risk or potential market shocks that may be caused by individual institution’s NSFR shortfall. 6A.3.2 The self-rectification mechanism will be applicable to a category 1 institution if the institution’s NSFR – (a) becomes less than 100% but not less than 90% at any time on a day (first shortfall day); and (b) has been not less than 100% at all times in the 12-month period immediately before the first shortfall day. 6A.3.3 Under these specified conditions, the institution will be given a period of 30 calendar days to rectify the NSFR shortfall. The institution will not be regarded as breaching the minimum NSFR requirement on the first shortfall day and during the subsequent 30-day period. However, the institution must notify the MA as soon as practicable as required under rule 8C and provide the MA with any particulars of the matter as the MA may

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79 request. This will enable the MA to assess the institution’s liquidity position and deliberate appropriate measures proactively. 89 6A.3.4 Rule 8B will cease to apply and a category 1 institution will breach the minimum NSFR requirement if its NSFR– (a) remains less than 100% at the expiry of the 30-day period; or (b) becomes less than 90% at any time. In this occasion, the institution must notify the MA of the relevant liquidity event immediately pursuant to rule 14. (Please refer to paragraphs 3.4.3 and 3.4.4 for the MA’s supervisory response to a relevant liquidity event.) 6B. Application of CFR 6B.1 Structure of CFR 6B.1.1 The minimum CFR provided in rule 8D is applicable to a category 2A institution on an average basis covering a calendar month. The average CFR has two components:
(a) The numerator is the sum of weighted amount of the institution’s ACF items, as determined in accordance with rule 77, for each working day of a calendar month. (b) The denominator is the sum of weighted amount of the institution’s RCF items, as determined in accordance with rule 80, for each working day of a calendar month. 6B.1.2 Pursuant to rule 76(2), the MA may permit a category 2A institution to calculate its average CFR by reference

89 For example, the MA may request the institution to formulate a plan to rectify the NSFR shortfall within the 30-day period. To facilitate closer monitoring, the MA may also request the institution to conduct projections or stress tests on its future NSFR position, or report its NSFR more frequently.

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80 to such days during a month as specified by the MA instead of covering each working day of a month. 90 6B.1.3 The ACF and RCF items and the applicable factors are specified in Table 3 and Table 4 of Schedule 6 to the BLR. Detailed requirements relating to the calculation of ACF and RCF are provided in the CIs for Part 3 of Return MA(BS)26. 6B.1.4 The MA may exercise the power under rule 78 (or rule
79) to require all category 2A institutions (or a
particular category 2A institution) to exclude any capital or liability (or a class of capital or liabilities) from the calculation of the ACF if the MA is satisfied that the capital or liability is not (or is no longer) a sufficiently reliable source of liquidity for inclusion as ACF. These rules will operate in a manner similar to the rules provided for the LCR, LMR and NSFR (see paragraphs
5.2.8 and 6A.1.3).
7. Liquidity disclosure standard
7.1 Under the Banking (Disclosure) Rules (BDR), an AI, unless
otherwise exempted, must disclose information relating to liquidity. The contents, formats and frequency of the required disclosures are largely prescribed in the standard disclosure templates and table specified by the MA under §§6(1)(ab) (for locally-incorporated AIs) and 88(1)(b) (for overseas￾incorporated AIs) of the BDR. An AI must disclose the relevant information in accordance with the relevant templates and
table (which come with explanatory notes and instructions for
their completion). In preparing the required disclosures, an AI should also have regard to SPM module CA-D-1 “Guideline on the Application of the Banking (Disclosure) Rules” which provides guidance to facilitate interpretation and compliance with the BDR.

90 Notwithstanding this possible permission, a category 2A institution should manage its liquidity position with a view to maintaining a stable trend in its CFR position. A category 2A institution should avoid bearing undue liquidity risk and “window dressing” it only on such days specified by the MA under rule 76(2).

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7.2 In summary, the required disclosures on liquidity of an AI
include the following information.
Liquidity risk management
7.2.1 Annual disclosure of information relating to its
approach to liquidity risk management is required that is necessary and relevant to the understanding of its liquidity risk position and liquidity management. Such information should include an AI’s business model, liquidity risk profile, organization structure and functions involved in liquidity risk management. The detailed requirements are set out in the standard disclosure Table LIQA specified by the MA. Liquidity ratios
7.2.2 Quarterly disclosure of its liquidity position is required
as represented by the applicable statutory liquidity ratios under the BLR. Disclosures required to be made in standard formats are set out in the standard disclosure Templates LIQ1 (for quarterly disclosure of LCR), LIQ2 (for semi-annual disclosure of NSFR) specified by the MA. For other quarterly disclosures, no standard format is specified.
7.2.3 As mentioned in SPM module CA-D-1 (paragraph 3.2),
the MA encourages AIs to make more extensive voluntary disclosures where it is practical for them to do so. In respect of liquidity information, AIs are encouraged to disclose, among others:
(a) the size and composition of the AI’s liquidity cushion maintained according to section 8 of SPM module LM-2; and (b) the extent to which the AI is subject to additional collateral requirements in relevant contracts as a result of a credit rating downgrade.

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Annex 1 : Assets regarded as “free from encumbrances” under LCR,
LMR and NSFR
Treatment under LCR and LMR

1. As required under §2(5) of Schedule 4 to the BLR, each asset included
   in a category 1 institution’s HQLA must be “free from encumbrances” and, in particular, there must be no regulatory, legal, contractual or other restrictions that inhibit the institution from liquidating, selling, transferring or assigning any asset in the institution’s HQLA. A similar requirement is also set out in rule 49(2)(c) for liquefiable assets held by category 2 institutions for LMR purposes.
2. The meaning of “free from encumbrances” for HQLA under the LCR is
   elaborated in §3(2) of Schedule 4 to the BLR. This elaboration is also applicable to liquefiable assets under the LMR (with all necessary modifications).
3. An asset must not be regarded as “free from encumbrances” if it is
   pledged by an AI (either explicitly or implicitly) to secure, collateralise or provide credit enhancement to any transaction, or the asset is designated by an AI to cover specific expenses (such as rents and salaries).
4. Where an asset is pledged to an AI in a securities financing transaction
   or derivative contract, the asset may be included as HQLA under the LCR, or liquefiable assets under the LMR, subject to all other qualifying requirements being met, only if – (a) the AI has a contractual right to re-hypothecate the asset, but the asset has not been re-hypothecated and is legally and contractually available for use by the AI, to obtain liquidity within the LCR period (or LMR period as the case may be); (b) the AI has no obligation to return the asset to a third party upon demand or at any time within the LCR period (or LMR period); and (c) the AI has included the expected cash outflows arising from the securities financing transaction or derivative contract within the LCR period (or LMR period as the case may be) in the calculation of its total expected cash outflows under the LCR (or qualifying liabilities under the LMR).

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5. An asset may be regarded as free from encumbrances if that asset is
pre-positioned or deposited with, or pledged to, the MA, a central bank or PSE for the purpose of obtaining liquidity facilities, to the extent that the AI has not utilised the asset to draw on those facilities.
6. If a category 1 institution has pre-positioned or deposited with, or
pledged to, the MA, a central bank or PSE a pool of assets consisting of level 1 assets, level 2A assets, level 2B assets and other assets that do not qualify as HQLA, and no specific assets in the pool have been designated as collateral, the institution may, in determining which assets in the pool will be encumbered as it draws upon the facilities, adopt the following order – (a) first order of encumbrance: assets not qualified as HQLA; (b) second order of encumbrance: level 2B assets that are not approved RMBS; (c) third order of encumbrance: approved RMBS; (d) fourth order of encumbrance: level 2A assets; and (e) fifth order of encumbrance: level 1 assets.
7. Likewise, for LMR purposes, if a category 2 institution has pre￾positioned or deposited with, or pledged to, the MA, a central bank or
PSE a pool of assets consisting of liquefiable assets and other assets that do not qualify as liquefiable assets, and no specific assets in the pool have been designated as collateral, the institution may, in determining which assets in the pool will be encumbered as it draws upon the facilities, adopt the following order:
(a) first order of encumbrance: assets not qualified as liquefiable assets; (b) second order of encumbrance: liquefiable assets, to be ranked by the ascending order of the respective levels of Liquidity Conversion Factor.
8. If an AI hedges the market risk of an asset included in its stock of HQLA
(or liquefiable assets), it must take into account the cash flows that may arise from the hedging arrangement (including any early closure of the hedge when the asset is sold) in the calculation of its LCR or LMR.

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Treatment under NSFR
9. As required under rule 68(6) of the BLR, if an asset is not free from
encumbrances, a category 1 institution must apply to the asset a RSF factor of –  a minimum of 50%, if the asset is encumbered for 6 months to less than 12 months; or  100%, if the asset is encumbered for 12 months of more. An asset encumbered for less than 6 months can be treated in the same way as if the asset were free from encumbrances.
10. However, the above treatment does not apply to initial margins (IM),
default fund contributions (DFC) or variation margins (VM) posted by the institution to its counterparty under derivative contracts, as IM, DFC and VM are subject to specified treatments under the NSFR. (Please refer to
Annex 1 and Annex 3 of the CIs for Return MA(BS)26).
11. The meaning of “free from encumbrances” under the NSFR (as defined
in rule 59(1)) is in line with the meaning under the LCR and LMR (as underlined in paragraph 1 above). Therefore, the elaborations provided in paragraphs 3, 5 and 6 are also applicable to the NSFR.
12. For the avoidance of doubt, the guidance provided in this Annex does
not apply to the CFR, as there is no distinct treatment for encumbered assets under this ratio.

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Annex 2 : Treatment of RMBS under LCR, LMR and NSFR
Recognition of RMBS as level 2B assets under LCR and NSFR

1. In the light of the fact that RMBS could quickly become illiquid in times
   of market stress, the MA considers it necessary to exercise a greater degree of scrutiny over the inclusion of RMBS by category 1 institutions as HQLA.
2. As required under §8 in Part 3 of Schedule 2 to the BLR, a category 1
   institution must apply for the MA’s approval in order to include any issue of RMBS in its HQLA. 91 The applying institution must demonstrate to the MA’s satisfaction that the RMBS, which are the subject of the application, meet – (a) the characteristics and operational requirements set out in Schedules 3 and 4 to the BLR respectively – please refer to paragraphs 5.2.3 to 5.2.6 of this module; and (b) all qualifying criteria specified in respect of RMBS under §8 in
   Part 3 of Schedule 2 to the BLR.
3. The qualifying criteria as referred to in paragraph 2(b) of this Annex
   require that the RMBS –
   (a) are issued, and their underlying assets (which must not contain any structured financial instrument) are originated, by a person other than the institution holding the RMBS or any of the institution’s associated entities. (This means that an institution must not recognise any RMBS as level 2B assets if such RMBS may represent a claim on, or an exposure to, the institution or any of its associated entities); (b) have a long-term ECAI issue specific rating of not lower than AA; (c) are traded in large, deep and active markets, characterised by a low level of concentration, and where the debt securities can be monetized through direct sale or repo-style transactions;

91 To avoid doubt, any approval granted by the MA for an AI to include RMBS as liquefiable assets under the previous Liquidity Ratio regime cannot be deemed valid for LCR or LMR purposes.

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(d) have a proven record as a reliable source of liquidity in the markets even during a period of financial stress. Specifically, the RMBS must not have experienced a decline of more than 20% of their market price, or an increase in haircut of more than 20 percentage points if they are used as collateral in a repo-style transaction, within any period of 30 calendar days during a “relevant period of significant liquidity stress” since the RMBS were issued (where applicable), or in the absence of such a “relevant period of significant liquidity stress”, any such period of 30 calendar days since the RMBS were issued; (e) are backed by a pool of residential mortgage loans that have full recourse to the mortgagor and the weighted average loan-to￾value ratio of which does not exceed 80% at the time when the RMBS are issued; and (f) are subject to regulations which require issuers of the RMBS to retain an interest in the RMBS.
4. Moreover, the applying institution must demonstrate to the MA’s
satisfaction that it has the required capacity to manage the risks arising from the holding of the RMBS concerned. Recognition of RMBS as liquefiable assets under LMR
5. To maintain a level playing field between category 1 institutions and
category 2 institutions in relation to the treatment of RMBS, the MA applies the same set of qualifying criteria for determining institutions’ applications for including RMBS as HQLA under the LCR or as “liquefiable assets” under the LMR. Therefore, paragraphs 2 to 4 of this
Annex are similarly applicable for LMR purposes, with all necessary
modifications. In other words, no approval will be granted to a category 2 institution for inclusion of RMBS as liquefiable assets for LMR purposes, unless the MA is satisfied that – (a) the relevant RMBS are able to meet – (i) the requirements set out in rule 49(2) that are applicable generally to liquefiable assets; and (ii) qualifying criteria comparable to those applicable to the recognition of RMBS for LCR purposes; and

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(b) the applying institution has sufficient capacity to manage the relevant risks associated with its holding of such RMBS. Application
6. It is therefore necessary for the applying institution to conduct a detailed
assessment of the relevant RMBS and provide the relevant information for the MA to consider its application. An application without the required detailed assessment will not be considered.
7. Any application for inclusion of RMBS under the LCR or LMR will be
carefully assessed by the MA. Where necessary, the MA may attach conditions to an approval, such as imposing a maximum limit for the inclusion of a certain issue, or the entire portfolio, of RMBS by an institution as HQLA (or liquefiable assets). ————————— Contents Glossary Home Introduction

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under the Banking Ordinance
LIQUIDITY POSITION OF AN AUTHORIZED INSTITUTION

• (HONG KONG OFFICE / UNCONSOLIDATED / CONSOLIDATED) BASIS
  For the month of...................................................
  Date of Submission
  Chief Accountant Chief Executive
  Name Telephone Number
  MA(BS)1E (Rev. 1/2020)
  Co. No. MM YY CAT.
  Information requested in this Return is required under section 63(2) of the Banking Ordinance. The Return should be submitted to the Monetary Authority not later than 14 days after the last day of each calendar month, unless otherwise advised by the Monetary Authority. Note : This Return is to be prepared in accordance with the Completion Instructions issued by the Monetary Authority (MA). An authorized institution designated by the MA as a category 1 institution, or not designated as such (in the case of a category 2 institution), must complete the relevant parts of the Return that are applicable to it. (For Official Use Only) Is the institution designated by the Monetary Authority as a category 1 institution under rule 3 of the Banking (Liquidity) Rules (BLR)? [ Yes / No * ] The Banking Ordinance K1 SECRET Name of Authorized Institution We certify that the information reported in this Return is, to the best of our knowledge and belief, correct. Name and telephone number of responsible person who may be contacted by the Monetary Authority in case of any query.
• Delete where inapplicable.

PART 1 – SUMMARY CERTIFICATE OF LIQUIDITY POSITION
(HK$'000)
(I)
Month-end position
1.1 Sum of level 1 assets, level 2A assets and level 2B assets (before deductions) 0
1.2 Total weighted amount of HQLA (after deductions) 0
1.3 Total expected cash outflows 0
1.4 Total expected cash inflows (before application of 75% inflow ceiling) 0
1.5 Total expected cash inflows (after application of 75% inflow ceiling) 0
1.6 Total net cash outflows 0
1.7 LCR (month-end) (%) #DIV/0!
Additional information
1.8 Highest LCR during the reporting period (%)
1.9 Lowest LCR during the reporting period (%)
1.10
Lowest level of HKD-denominated HQLA (level 1 assets) as a percentage of HKD￾denominated total net cash outflows (before application of 75% inflow ceiling) during the reporting period (II) Summary of information on Liquidity Maintenance Ratio (LMR) Month-end position
2.1 Liquefiable assets 0
2.2 Qualifying liabilities (after deductions) 0
2.3 LMR (month-end) (%) #DIV/0!
Average position during the reporting period
2.4 Liquefiable assets 0
2.5 Qualifying liabilities (after deductions) 0
2.6 LMR (average) (%) #DIV/0!
2.7 Lowest LMR during the reporting period (%)
Summary of information on Liquidity Coverage Ratio (LCR)

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (I): Liquidity Coverage Ratio (Month-end position) (HK$'000)
HK$ US$ Other major currencies RMB Other currencies 1 (a) Currency notes and coins (re Banking (Liquidity) Rules (BLR) Schedule 2, Part 2, section 1(a)) 100% 0 (b) Withdrawable central bank reserves (re BLR Schedule 2, Part 2, section 1(b)) 100% 0 (c) Marketable debt securities that are issued or guaranteed by a sovereign, central bank, public sector entity, relevant international organization or multilateral development bank, or that are EF debt securities (re BLR Schedule 2, Part 2, section 1(c) & Part 3, section 1) 100% 0 (d) Marketable debt securities that are issued by the sovereign or central bank of a country and denominated in the local currency of that country, or that are EF debt securities (re BLR Schedule 2, Part 2, section 1(d) & Part 3,
section 2)
100% 0
(e) Marketable debt securities that are issued by the sovereign or central bank of a country and denominated in a currency that is not the local currency of that country (re BLR Schedule 2, Part 2, section 1(e) & Part 3, section 3) 100% 0 (f) Total level 1 assets (before deductions) (= A1(a) + A1(b) + A1(c) + A1(d) + A1(e)) 0 2 (a) Marketable debt securities that are issued or guaranteed by a sovereign, central bank or public sector entity (re BLR Schedule 2, Part 2, section 2(a) & Part 3, section 4) 85% 0 (b) Marketable debt securities issued by corporates (re BLR Schedule 2, Part 2, section 2(b) & Part 3, section 5) 85% 0 (c) Covered bonds (re BLR Schedule 2, Part 2, section 2(c) & Part 3, section 6) 85% 0 (d) Total level 2A assets (before deductions) (= A2(a) + A2(b) + A2(c)) 0 3 (a) Marketable debt securities issued by a sovereign, central bank, public sector entity or corporates (re BLR Schedule 2, Part 2, section 3(a) & Part 3, section 7) 50% 0 (b) Listed ordinary shares (re BLR Schedule 2, Part 2, section 3(c) & Part 3, section 10) 50% 0 (c) Approved RMBS (re BLR Schedule 2, Part 2, section 3(b) & Part 3, sections 8 & 9) 75% 0 (d) Total level 2B assets (before deductions) (= A3(a) + A3(b) + A3(c)) 0 4 0 5 0 6 0 7 0 A HIGH QUALITY LIQUID ASSETS (HQLA) Weighted amount TOTAL WEIGHTED AMOUNT OF HQLA (AFTER DEDUCTIONS) (= Max(A4 – A5 –A6,0)) Level 2B assets Sum of level 1 assets, level 2A assets and level 2B assets (before deductions) (= A1(f) + A2(d) + A3(d)) Deduction: adjustments for 15% ceiling on level 2B assets and 40% ceiling on sum of level 2A and level 2B assets (as calculated in Section (II), Table 1, item 3) Level 2A assets Breakdown of weighted amount by currencies Level 1 assets Weight Principal amount Deduction: foreign exchange haircuts (if BLR rule 37 is applicable) (as calculated in Section (II), Table 2, item 12)

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (I): Liquidity Coverage Ratio (Month-end position) (HK$'000)
B
HK$ US$ Other major currencies RMB Other currencies (a) 0 (b) 10% 0 (c) 5% 0 (a) (b) (c) (a) 0 (b) 10% 0 (c) 5% 0 (a) (b) (c) (a) 0 (b) 25% 0 (c) (a) (i) amount entirely protected by EDIS 20% 0 (ii) not covered under sub-item B6(a)(i) 40% 0 (b) 100% 0 7 100% 0 (a) 0% 0 Secured funding transactions (other than securities swap transactions), where the counterparty of the transaction is – the MA for a/c of Exchange Fund (if the reporting institution is incorporated in HK), or the central bank of the country in which the reporting institution is incorporated Debt securities and prescribed instruments issued by the reporting institution and redeemable within the LCR period Small business funding taken by overseas offices stable small business funding less stable small business funding small business term funding Operational deposits fully insured by an effective deposit insurance scheme (EDIS) not covered under sub-item B5(a) Memorandum item : Excess operational deposits (excluded from sub-item B5(a) or B5(b)) Unsecured wholesale funding (other than operational deposits) provided by corporates (other than small business customers), sovereigns, the MA for a/c of Exchange Fund, central banks, multilateral development banks and public sector entities other than funding mentioned in item B3, B4, B5 or sub-item B6(a) Retail deposits taken by overseas offices 3 Small business funding taken by HK office stable small business funding less stable small business funding small business term funding stable retail deposits less stable retail deposits retail term deposits Weighted amount Breakdown of weighted amount by currencies stable retail deposits less stable retail deposits retail term deposits Retail deposits taken by HK office Principal amount TOTAL EXPECTED CASH OUTFLOWS arising from – Weight 8 5 4 1 6 2

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (I): Liquidity Coverage Ratio (Month-end position) (HK$'000)
B
HK$ US$ Other major currencies RMB Other currencies Weighted amount Breakdown of weighted amount by currencies Principal amount TOTAL EXPECTED CASH OUTFLOWS arising from – Weight (b) (i) level 1 assets 0% 0 (ii) level 2A assets 15% 0 (iii) approved RMBS 25% 0 (iv) level 2B assets that are not approved RMBS 25% 0 (v) assets that do not fall within any of paragraphs (i) to (iv) 25% 0 (c) (i) level 1 assets 0% 0 (ii) level 2A assets 15% 0 (iii) approved RMBS 25% 0 (iv) level 2B assets that are not approved RMBS 50% 0 (v) assets that do not fall within any of paragraphs (i) to (iv) 100% 0 9 0 10 11 100% 0 12 0 13 100% 0 14 0 15 100% 0 16 100% 0 17 100% 0 18 100% 0 19 0 20 21 0 22 100% 0 23 TOTAL EXPECTED CASH OUTFLOWS (= B1 to B22) 0 Potential loss in market value of posted collateral securing derivative contracts or other transactions (as calculated in Section (II), Table 6) Excess non-segregated collateral callable by counterparty under derivative contracts or other transactions Collateral substitution under derivative contracts or other transactions (as calculated in Section (II), Table 7) Contractual obligations to post collateral to counterparty under derivative contracts or other transactions (not otherwise covered in Section (I)B) Increase in collateral needs arising from adverse changes in market value of derivative contracts or other transactions (approximated by calculation of "Value X") Repayment of funding obtained from structured financial instrument issued by the reporting institution and redeemable within the LCR period Obligations for repayment of maturing debt or provision of funding or assets arising from any embedded option in structured financing transactions Potential drawdown of undrawn committed facilities (as calculated in Section (II), Table 8) Contractual lending obligations not otherwise covered in Section (I)B (as calculated in Section (II), Table 9) Other contingent funding obligations (whether contractual or non-contractual) (as calculated in Section (II),
Table 10)
Other contractual cash outflows the Government or a qualifying domestic public sector entity (if the reporting institution is incorporated in HK), the sovereign or a qualifying foreign public sector entity of the country in which the reporting institution is incorporated, or a multilateral development bank, and the transaction is collateralized by – Derivative contracts or other transactions with material adverse event clauses an entity that does not fall within sub-item B8(a) or sub-item B8(b), and the transaction is collateralized by – Securities swap transactions (as calculated in Section (II), Table 3) Contractual net cash outflows arising from derivative contracts (as calculated in Section (II), Table 5, item 2(a))

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (I): Liquidity Coverage Ratio (Month-end position) (HK$'000)
C
HK$ US$ Other major currencies RMB Other currencies 1 0% 0 (a)

0% 0
(b)

15% 0
(c)

25% 0
(d)

50% 0
(e)
(i) for margin lending transactions 50% 0
(ii) for other secured lending transactions 100% 0 3 0 (a) 0% 0 (b) (i) the MA for a/c of Exchange Fund or central banks 100% 0 (ii) financial institutions 100% 0 (iii) retail customers 50% 0 (iv) small business customers 50% 0 (v) sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in paragraphs (i) to (iv) 50% 0 (a) 100% 0 (b) 50% 0 (c) 50% 0 6 100% 0 7 0% 0 8 0% 0 9 0 2 Maturing securities not included by the reporting institution in its HQLA Undrawn facilities granted by other financial institutions Operational deposits placed at other financial institutions Contractual net cash inflows arising from derivative contracts (as calculated in Section (II), Table 5, item 2(b)) Securities swap transactions not included in item C1 (as calculated in Section (II), Table 4) 10 Other contractual cash inflows arising from assets, transactions or activities not otherwise covered in Section (I)C, to be received from – 4 Secured and unsecured loans not otherwise covered in items C1, C2 and C3 – Contractual cash inflows from revolving loans or loans without specific maturity date Contractual cash inflows from loans (not covered in sub-item C4(a)) extended to￾the MA for a/c of Exchange Fund, central banks or financial institutions retail customers or small business customers sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in paragraph (a) or (b) 5 approved RMBS level 2B assets that are not approved RMBS assets that do not fall within any of sub-items C2(a) to (d) TOTAL EXPECTED CASH INFLOWS arising from - Release of balances maintained by the reporting institution in segregated accounts in accordance with requirements for protection of customer assets, where the customers are– Breakdown of weighted amount by currencies Secured lending transactions, where the reporting institution has re-hypothecated security obtained from the counterparty as collateral to cover the institution’s short position in that security Secured lending transactions (other than securities swap transactions) not covered in item C1, and the transaction is collateralized by – level 1 assets level 2A assets Principal amount Weight Weighted amount

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (I): Liquidity Coverage Ratio (Month-end position) (HK$'000)
C
HK$ US$ Other major currencies RMB Other currencies TOTAL EXPECTED CASH INFLOWS arising from - Breakdown of weighted amount by currencies Principal amount Weight Weighted amount (a) 100% 0 (b) 100% 0 (c)

50% 0
(d)

50% 0
(e)
50% 0
11
0
12
0
D #DIV/0!
Total expected cash inflows (before application of 75% inflow ceiling) (=C1 to C10) TOTAL EXPECTED CASH INFLOWS (after application of 75% inflow ceiling) (= Min(C11, 75%*B23) LIQUIDITY COVERAGE RATIO (month-end position) (=A7 / (B23 - C12)) 10 the MA for a/c of Exchange Fund or central banks financial institutions retail customers small business customers sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in paragraphs (a) to (d)

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 1 : Determination of adjustments for 15% ceiling on level 2B assets and 40% ceiling on sum of level 2A & level 2B assets (HK$'000)
HK$ US$ Other major currencies RMB Other currencies Adjustment for 15% ceiling (on level 2B assets) = Max {A3(d) – 15/85*(A1(f) +A2(d)), A3(d) – 15/60A1(f), 0} Adjustment for 40% ceiling (on sum of level 2A & level 2B assets) = Max {A2(d) + A3(d) – adjustment for 15% ceiling – 2/3A1(f), 0} (c) Sub-total (= 1(a) + 1(b)) 0 Adjustment for 15% ceiling (on level 2B assets) = Max {adjusted level 2B assets – 15/85*(adjusted level 1 assets + adjusted level 2A assets), adjusted level 2B assets –15/60* adjusted level 1 assets, 0} Adjustment for 40% ceiling (on sum of level 2A & level 2B assets) = Max {adjusted level 2A assets + adjusted level 2B assets – adjustment for 15% ceiling – 2/3*adjusted level 1 assets, 0} (c) Sub-total (= 2(a) + 2(b)) 0 Where – (d) adjusted level 1 assets (= total weighted amount of level 1 assets adjusted for the reversal of any relevant securities financing transaction involving the exchange by the reporting institution of any level 1 asset, level 2A asset or level 2B asset for receipt by the institution from counterparty of any level 1 asset within the LCR period) (e) adjusted level 2A assets (= total weighted amount of level 2A assets adjusted for the reversal of any relevant securities financing transaction involving the exchange by the reporting institution of any level 1 asset, level 2A asset or level 2B asset for receipt by the institution from counterparty of any level 2A asset within the LCR period) (f) adjusted level 2B assets (= total weighted amount of level 2B assets adjusted for the reversal of any relevant securities financing transaction involving the exchange by the reporting institution of any level 1 asset, level 2A asset or level 2B asset for receipt by the institution from counterparty of any level 2B asset within the LCR period) 3 0 Weighted amount Breakdown of weighted amount by currencies Adjustments without reversal of relevant securities financing transactions (a) 0 1 2 Adjustments with reversal of relevant securities financing transactions (if any) (a) 0 (b) 0 Max (1(c), 2(c)) (b) 0

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 2: Deduction from total HQLA - Calculation of additional adjustment due to foreign exchange haircuts (if BLR rule 37 is applicable) (HK$'000)
Total HK$ US$ Other major currencies RMB Other currencies 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 N/A 10 11 0 (%) 2% 8% 10% 10% (HK$'000 equivalent) 0 13 (Note: Unless otherwise required by the HKMA, a category 1 institution should insert 60% for any reporting month within 2015, 70% for 2016, 80% for 2017, 90% for 2018 and 100% for and after 2019.) Weighted amount Relevant portion of item 10 being used to cover HKD LCR mismatch Minimum required level of LCR applicable to the reporting institution (Note) 12 Total level 2A assets (before deductions) (= Section (I), item A2(d)) Total level 2B assets (before deductions) (= Section (I), item A3(d)) Total HQLA (before deductions) (= Section (I), item A4) Total expected cash outflows (= Section (I), item B23) Total expected cash inflows (before application of 75% inflow ceiling) (= Section (I), item C11) HKD-denominated HQLA (level 1 assets) as a percentage of HKD-denominated total net cash outflows (before adjustment for 75% inflow ceiling) (Note: Rule 37(d) is satisfied if item 9=/> 20%) Foreign currency-denominated HQLA (level 1 assets) exceeding foreign currency-denominated total net cash outflows (if any) (=Min(Max(Item 4 – Item 13Max(item 5 – item 6,0),0),item 1)) HKD LCR mismatch (= Max(item 13(item 5 – item 6) – item 4,0)) Total level 1 assets (before deductions) (= Section (I), item A1(f)) The part of item 7 that exceeds 25% of the reporting institution's HKD-denominated total net cash outflows (=Max(If (item 7 = 0, 0, item 7 – Max(item 5 – item 6,0)* Max(0,25% – (100% – item 13))),0) Foreign exchange haircuts

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 3: Expected cash outflow arising from securities swap transactions (HK$'000)
HK$ US$ Other major currencies RMB Other currencies (a) level 1 assets level 1 assets 0% 0 (b) level 1 assets level 2A assets 15% 0 (c) level 1 assets approved RMBS 25% 0 (d) level 1 assets level 2B assets that are not approved RMBS 50% 0 (e) level 1 assets assets that are not level 1 assets, level 2A assets or level 2B assets 100% 0 (f) level 2A assets level 2A assets 0% 0 (g) level 2A assets approved RMBS 10% 0 (h) level 2A assets level 2B assets that are not approved RMBS 35% 0 (i) level 2A assets assets that are not level 1 assets, level 2A assets or level 2B assets 85% 0 (j) approved RMBS approved RMBS 0% 0 (k) approved RMBS level 2B assets that are not approved RMBS 25% 0 (l) approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 75% 0 (m) level 2B assets that are not approved RMBS level 2B assets that are not approved RMBS 0% 0 (n) level 2B assets that are not approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 50% 0 (o) assets that are not level 1 assets, level 2A assets or level 2B assets assets that are not level 1 assets, level 2A assets or level 2B assets 0% 0 Total 0 Type of securities to be delivered by reporting institution to counterparty within the LCR period Weighted amount Breakdown of weighted amount by currencies Type of securities to be received by reporting institution from counterparty within the LCR period Principal amount of securities to be delivered by reporting institution Weight

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 4: Expected cash inflow arising from securities swap transactions (HK$'000)
HK$ US$ Other major currencies RMB Other currencies (a) level 1 assets level 1 assets 0% 0 (b) level 1 assets level 2A assets 15% 0 (c) level 1 assets approved RMBS 25% 0 (d) level 1 assets level 2B assets that are not approved RMBS 50% 0 (e) level 1 assets assets that are not level 1 assets, level 2A assets or level 2B assets 100% 0 (f) level 2A assets level 2A assets 0% 0 (g) level 2A assets approved RMBS 10% 0 (h) level 2A assets level 2B assets that are not approved RMBS 35% 0 (i) level 2A assets assets that are not level 1 assets, level 2A assets or level 2B assets 85% 0 (j) approved RMBS approved RMBS 0% 0 (k) approved RMBS level 2B assets that are not approved RMBS 25% 0 (l) approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 75% 0 (m) level 2B assets that are not approved RMBS level 2B assets that are not approved RMBS 0% 0 (n) level 2B assets that are not approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 50% 0 (o) assets that are not level 1 assets, level 2A assets or level 2B assets assets that are not level 1 assets, level 2A assets or level 2B assets 0% 0 Total 0 Breakdown of weighted amount by currencies Type of securities to be received by reporting institution from counterparty within the LCR period Type of securities to be delivered by reporting institution to counterparty within the LCR period Principal amount of securities to be received by reporting institution Weight Weighted amount

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 5: Contractual net cash outflows and contractual net cash inflows arising from derivative contracts (HK$'000)
HK$ US$ Other major currencies RMB Other currencies (a) Contractual cash outflows 0 (b) Contractual cash inflows 0 (a) Contractual net cash outflows after adjustments (re Code of Practice, clause 12(3) & (4)) 100% 0 (b) Contractual net cash inflows after adjustments (re Code of Practice, clause 30(3) & (4)) 100% 0 Weighted amount Breakdown of weighted amount by currencies Gross amount of cash flows (after collateral adjustments, if any) Net amount of cash flows Principal amount Weight 1 2

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 6: Expected cash outflow arising from potential loss in market value of posted collateral securing derivative contracts or other transactions (HK$'000)
HK$ US$ Other major currencies RMB Other currencies 1 Collateral (other than level 1 assets) posted by the reporting institution to counterparties under derivative contracts or other transactions (posted collateral ) 2 Collateral (other than level 1 assets) received by the reporting institution from the same counterparties under derivative contracts or other transactions that can be deducted from item 1 (received collateral ) 3 Net amount of posted collateral (= Max (item 1 – item 2), 0) 0 20% 0 Principal amount Weight Weighted amount Breakdown of weighted amount by currencies

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
(HK$'000)
HK$ US$ Other major currencies RMB Other currencies (a) level 1 assets level 1 assets 0% 0 (b) level 1 assets level 2A assets 15% 0 (c) level 1 assets approved RMBS 25% 0 (d) level 1 assets level 2B assets that are not approved RMBS 50% 0 (e) level 1 assets assets that are not level 1 assets, level 2A assets or level 2B assets 100% 0 (f) level 2A assets level 2A assets 0% 0 (g) level 2A assets approved RMBS 10% 0 (h) level 2A assets level 2B assets that are not approved RMBS 35% 0 (i) level 2A assets assets that are not level 1 assets, level 2A assets or level 2B assets 85% 0 (j) approved RMBS approved RMBS 0% 0 (k) approved RMBS level 2B assets that are not approved RMBS 25% 0 (l) approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 75% 0 (m) level 2B assets that are not approved RMBS level 2B assets that are not approved RMBS 0% 0 (n) level 2B assets that are not approved RMBS assets that are not level 1 assets, level 2A assets or level 2B assets 50% 0 (o) assets that are not level 1 assets, level 2A assets or level 2B assets assets that are not level 1 assets, level 2A assets or level 2B assets 0% 0 Total 0
Table 7: Expected cash outflow arising from collateral substitution under derivative contracts or other transactions
Type of collateral posted to reporting institution by counterparty Weighted amount Type of assets that may be posted by Breakdown of weighted amount by currencies counterparty to reporting institution for collateral substitution Principal amount of collateral held by reporting institution Weight

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 8: Expected cash outflow arising from potential drawdown of undrawn committed facilities (HK$'000)
HK$ US$ Other major currencies RMB Other currencies (a) retail customers 5% 0 (b) small business customers 5% 0 (c) corporates (other than small business customers), sovereigns, the MA for a/c of Exchange Fund, central banks, public sector entities or multilateral development banks 10% 0 (d) banks 40% 0 (e) financial institutions (other than banks) 40% 0 (f) other entities not falling within sub-items 1(a) to 1(e) 100% 0 (g) Sub-total (1) 0 (a) retail customers 5% 0 (b) small business customers 5% 0 (c) corporates (other than small business customers), sovereigns, the MA for a/c of Exchange Fund, central banks, public sector entities or multilateral development banks 30% 0 (d) banks 40% 0 (e) financial institutions (other than banks) 100% 0 (f) other entities not falling within sub-items 2(a) to 2(e) 100% 0 (g) Sub-total (2) 0 3 0 Total (1(g) + 2(g)) Principal amount of undrawn facility limits, net of HQLA collateral (if any) Weight Weighted amount Breakdown of weighted amount by currencies Committed credit facilities granted to – Committed liquidity facilities granted to – 1 2

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 9: Contractual lending obligations not otherwise covered in Section (I)B (HK$'000)
HK$ US$ Other major currencies RMB Other currencies 1 100% 0 (a) retail customers 100% 0 (b) small business customers 100% 0 (c) sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in item 1, sub-item 2(a) or sub-item 2(b) 100% 0 (a) retail customers (re Section (I)C, sub-item 4b(iii)) 0 (b) small business customers (re Section (I)C, sub-item 4b(iv)) 0 (c) sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in sub-item 3(a) or 3(b) and are not the MA for a/c of Exchange Fund, central banks or financial institutions (re Section (I)C, item 4b(v)) 0 (a) retail customers 0 (b) small business customers 0 (c) sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers), or any other persons not included in item 1, sub-item 2(a) or sub-item 2(b) 0 5 0 Total contractual lending obligations not otherwise covered in Section (I)B (= items 1 + 4(a) + 4(b) + 4(c)) Contractual lending obligations to the MA for a/c of Exchange Fund, central banks or financial institutions not otherwise covered in Section (I)B Contractual cash inflows from secured or unsecured loans under item 4 of
Section (I)C, to be received from –
Contractual lending obligations to (if any) – Weight Weighted amount Breakdown of weighted amount by currencies Principal amount Contractual lending obligations to – 4 3 2

Part 2 – LIQUIDITY COVERAGE RATIO (to be reported by category 1 institutions only)
Section (II): Supplementary information
Table 10: Other contingent funding obligations (HK$'000)
HK$ US$ Other major currencies RMB Other currencies 1 3% 0 2 10% 0 3 0% 0 (a) debt securities or structured financial instruments, in respect of which the reporting institution (or its associated entity) is the issuer, a market maker or a dealer, or has been involved as an originator, sponsor, marketing agent or seller, where there is a reasonable expectation that the obligations will materialize within the LCR period 100% 0 (b) money market funds or other types of collective investment funds marketed by the reporting institution (or its associated entity), where there is a reasonable expectation that the obligations will be materialized within the LCR period 100% 0 (c) situations in which customer short positions are covered by assets (that are not HQLA qualifying assets) received by the institution from its other customers as collateral, in respect of which the institution has the right of re-hypothecation, such that the institution may be obliged to provide funding within the LCR period to cover uncovered customer short positions in the event of withdrawal of the collateral by its other customers 50% 0 (d) potential liquidity drawn by an unconsolidated joint venture or entity in which the reporting institution has a minority interest, where there is a reasonable expectation that the institution will be the main liquidity provider when the joint venture or entity concerned is in need of liquidity (Note) 0 (e) circumstances not otherwise specified in sub-items 4(a) to (d), where there is a reasonable expectation that the obligations will materialize with the LCR period 100% 0 5 0 Note: If the reporting institution has reasonable expectation that a non-zero amount should be reported in sub-item 4(d), it must notify the HKMA in order to agree a methodology (including the outflow rate) for determining the amount to be reported. Otherwise, insert an outflow rate of 0% for this sub-item. Breakdown of weighted amount by currencies Trade-related contingencies (other than funding obligations arising from potential drawdown of committed credit facilities granted to corporates for import or export financing purposes) Guarantees and letters of credit unrelated to trade-related contingencies Uncommitted facilities Non-contractual contingent funding obligations arising from – Principal amount Weight Weighted amount 4 Total

Part 3 – LIQUIDITY MAINTENANCE RATIO (to be reported by Category 2 institutions only)
(I) LIQUIDITY MAINTENANCE RATIO (Month-end position) (HK$'000) HK$ US$ RMB Other currencies (A1) 100 0 (A2) 90 0 (A3) 100 0 (a) 0 (b) 0 (c) 0 80 0 (a) 90 0 (b) 90 0 (a) (i) (A) not more than 1 year 100 0 (B) more than 1 year 95 0 (ii) (A) not more than 1 month 100 0 (B) more than 1 month but not more than 1 year 95 0 (C) more than 1 year 90 0 Breakdown of weighted amount by currencies Net due from banks (= (A4)(a) - (A4)(b) ≥ 0, subject to the weighted amount not exceeding 40% of the weighted amount of qualifying liabilities (before deductions). Any excess amount will be included under item (C3).) payable within 1 month and which are either drawn under letters of credit issued by banks or accepted and payable by banks covered by irrevocable re-discounting facilities approved by the MA issued or guaranteed by – Total one-month liabilities of other banks to the reporting institution Total one-month liabilities of the reporting institution to other banks the Government, the MA for a/c of Exchange Fund, or a domestic public sector entity with a remaining term to maturity of – an authorized institution incorporated in HK or the HK branch of an authorized institution incorporated outside Hong Kong with a remaining term to maturity of – Marketable debt securities or prescribed instruments that are– Principal amount Liquidity conversion factor (%) A. LIQUEFIABLE ASSETS Weighted amount (A4) (A5) Currency notes and coins Gold bullion Claims on, or reserves maintained with, the MA for a/c of the Exchange Fund or central banks that are repayable to the reporting institution overnight, on demand, or on notice which expires on the first day of the LMR period Net due from banks of the reporting institution to be included in its liquefiable assets (For completion by the reporting institution if its net due from banks ≥ 0) Export bills – (A6)

Part 3 – LIQUIDITY MAINTENANCE RATIO (to be reported by Category 2 institutions only)
(I) LIQUIDITY MAINTENANCE RATIO (Month-end position) (HK$'000) HK$ US$ RMB Other currencies (b) (A) not more than 1 year 100 0 (B) more than 1 year 95 0 (c) (i) (A) not more than 1 month 100 0 (B) more than 1 month but not more than 1 year 95 0 (C) more than 1 year 90 0 (ii) (A) not more than 1 year 90 0 (B) more than 1 year but not more than 5 years 85 0 (C) more than 5 years 80 0 (d) (i) (A) the debt security or instrument has a remaining term to maturity of not more than 1 month; or 100 0 (B) the bank has a qualifying ECAI issuer rating 80 0 (ii) 80 0 (e) 80 0 Breakdown of weighted amount by currencies without a qualifying ECAI issue specific rating, issued or guaranteed by – a bank, other than those included in sub-item (A6)(a)(ii), if – not included elsewhere in item (A6), re-discountable with the MA for a/c of Exchange Fund, or the central bank of a country that has a qualifying ECAI issuer rating (where such re-discounting arrangement is available to the reporting institution) a regional government of a country which has a qualifying ECAI issuer rating – issued or guaranteed by the central bank or central government of a country, a multilateral development bank, or a relevant international organization, where the debt security or instrument, or its issuer or guarantor, has a qualifying ECAI rating, and the remaining term to maturity is – a bank, other than those included in sub-item (A6)(a)(ii), with a remaining term to maturity of – a regional government of a country or other entity, with a remaining term to maturity of – Principal amount Liquidity conversion factor (%) Weighted amount with a qualifying ECAI issue specific rating, issued or guaranteed by – A. LIQUEFIABLE ASSETS

Part 3 – LIQUIDITY MAINTENANCE RATIO (to be reported by Category 2 institutions only)
(I) LIQUIDITY MAINTENANCE RATIO (Month-end position) (HK$'000) HK$ US$ RMB Other currencies (f) (i) 80 0 (ii) 80 0 (g) 80 0 (h) 50 0 (A7) Listed ordinary shares (re BLR rule 49(2)(fa) & Schedule 2, Part 2, section 3(c)) 50 0 (A8) 90 0 (A9) 100 0 (A10) 0 HK$ US$ RMB Other currencies (B1) 100 0 (B2) 100 0 (B3) 100 0 (B4) 0 A. LIQUEFIABLE ASSETS Principal amount Liquidity conversion factor (%) Weighted amount Breakdown of weighted amount by currencies Breakdown of weighted amount by currencies Residential mortgage loans in respect of which there has been issued by The Hong Kong Mortgage Corporation Limited an irrevocable commitment to purchase which is approved by the MA LIQUEFIABLE ASSETS (=sum of (A1) to (A8) - (A9)) other debt securities or instruments not included elsewhere in item (A6) with a remaining term to maturity of not more than 1 month DEDUCTION FROM LIQUEFIABLE ASSETS:
Debt securities or prescribed instruments with a remaining term to maturity of not more than 1 month issued by the reporting institution having an investment-grade rating, that are not covered by 6(a), (b), (c), (d), (e), (f) or (g) RMBS RMBS, other debt securities or instruments specifically approved for inclusion by the MA – Principal amount Liquidity conversion factor (%) B. QUALIFYING LIABILITIES Weighted amount Total one-month liabilities of the reporting institution to the MA for a/c of Exchange Fund or central banks Other one-month liabilities QUALIFYING LIABILITIES (BEFORE DEDUCTIONS) (= sum of (B1) to (B3)) If the reporting institution's total one-month liabilities to other banks exceed the total one￾month liabilities of other banks to the institution, the amount of the institution's total one￾month liabilities to other banks

Part 3 – LIQUIDITY MAINTENANCE RATIO (to be reported by Category 2 institutions only)
(I) LIQUIDITY MAINTENANCE RATIO (Month-end position) (HK$'000) HK$ US$ RMB Other currencies (C1) 100 0 (C2) 100 0 (C3) 0 (C4) 80 0 (C5) 0 (C6) 0 D. 0 E. #DIV/0! (II) AVERAGE LIQUIDITY MAINTENANCE RATIO DURING THE REPORTING PERIOD Weighted amount A. B. C. D. #DIV/0! Breakdown of weighted amount by currencies QUALIFYING LIABILITIES (AFTER DEDUCTIONS) (=(B4) – (C6)) DEDUCTION FROM QUALIFYING LIABILITIES (limited by 75% of item (B4)) Sub-total (sum of items (C1) to (C4)) Total one-month liabilities of the MA for a/c of the Exchange Fund, or central banks to the reporting institution (other than the amount included in item (A3)) Eligible loan repayments Weighted amount, if any, of the reporting institution's net due from banks exceeding the 40% cap referred to in BLR rule 48(7) If the reporting institution's total one-month liabilities to other banks exceed the total one￾month liabilities of other banks to the institution, the amount of the total one-month liabilities of other banks to it LIQUIDITY MAINTENANCE RATIO (month-end) (= (A10) / (D)) Average liquefiable assets Average qualifying liabilities (before deductions) Average qualifying liabilities (after deductions) Average Liquidity Maintenance Ratio (= A / C) Principal amount Liquidity conversion factor (%)
C. DEDUCTION FROM QUALIFYING LIABILITIES Weighted amount

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MA(BS)1E / P.1 (01/2020)
Completion Instructions
Return of Liquidity Position of an Authorized Institution Form MA(BS)1E INTRODUCTION

1. This document sets out the Completion Instructions (CIs) for authorized institutions
   (AIs) to compile the above Return, which is used by the Monetary Authority (MA) to collect information from AIs on their liquidity ratios and related information. This document should be read in conjunction with – (i) the Banking (Liquidity) Rules (BLR), made by the MA under section 97H of the Banking Ordinance (BO) to prescribe liquidity requirements applicable to AIs. The BLR set out the requirements relating to, among other statutory liquidity ratios, the Liquidity Coverage Ratio (LCR) and the Liquidity Maintenance Ratio (LMR). The LCR is applicable to AIs designated by the MA as category 1 institutions under rule 3 1 , whereas the LMR is applicable to other AIs that are not designated as category 1 institutions (i.e. category 2 institutions); (ii) the Banking (Liquidity Coverage Ratio – Calculation of Total Net Cash Outflows) Code (CoP) approved and issued under section 97M of the BO for the purposes of providing guidance on the calculation of “total net cash outflows”, the denominator of the LCR; (iii) the statutory guideline Regulatory Framework for Supervision of Liquidity Risk (LM-1) issued by the MA under the Supervisory Policy Manual (SPM), which sets out the MA’s approach to supervising AIs’ liquidity risk and provides supplementary guidance to AIs in respect of the requirements on statutory liquidity ratios LCR or LMR requirements applicable to them under the BLR; and (iv) the statutory guideline Sound Systems and Controls for Liquidity Risk Management (LM-2) under the SPM, which sets out the MA’s supervisory expectations on AIs’ liquidity risk management systems. The terms used in this Return should, unless specified otherwise or the context requires otherwise, be ascribed to the meanings used in the BLR or CoP, as the case may be.

1 Unless the context otherwise requires, a reference to a “rule” in these CIs means a rule in the BLR.

MA(BS)1E / P.2 (01/2020)
2. This Return consists of 3 Parts:
(i) Part 1 summarises certain key information relating to the reporting institution’s liquidity ratio. Most of the items in this Part are automatically generated from information reported in other Parts of this Return. (ii) Part 2 captures relevant information pertaining to the calculation of the LCR. This Part should be completed by all category 1 institutions. (iii) Part 3 captures relevant information pertaining to the calculation of the LMR. This Part should be completed by all category 2 institutions.
3. This Return is supplemented by the following returns, which are used by the MA to
collect other liquidity-related information from AIs:
 MA(BS)18 – Return on Selected Data for Liquidity Stress-testing;  MA(BS)22 – Return on Intraday Liquidity Position of an Authorized Institution;  MA(BS)23 – Return on Liquidity Monitoring Tools; and  MA(BS)26 – Return of Stable Funding Position of an Authorized Institution.

MA(BS)1E / P.3 (01/2020)
GENERAL INSTRUCTIONS
Bases of reporting
4. In line with the basis of calculation required under rule 10(1)(a), all AIs (irrespective
of their place of incorporation) must report their LCR or LMR, as the case may be, on a Hong Kong office basis. AIs incorporated in Hong Kong must, pursuant to the bases of calculation required under rules 10(1)(b) and 11(1), additionally report their LCR or LMR respectively on the following bases where applicable 2 :
(i) Unconsolidated basis, covering the AI’s Hong Kong office and overseas branches (if any); and (ii) Consolidated basis (if the AI has one or more than one associated entity), covering the AI’s Hong Kong office, overseas branch(es), and any associated entity specified by the MA on a case-by-case basis. To avoid doubt, references in this Return to an AI incorporated in Hong Kong, in terms of reporting of the LCR or LMR on a consolidated basis, should also be construed in the context of the AI’s consolidated group. Reporting frequency and submission timeline
5. A reporting institution should submit this Return (i.e. a separate copy of this Return for
each basis of reporting applicable to it) to the MA not later than 14 days after the last day of each calendar month (i.e. the month-end reporting date). If the submission date falls on a public holiday, it will be deferred to the next working day.
6. In each monthly submission, the reporting period covered in this Return refers to the
calendar month ending on the month-end reporting date.
Valuation of assets, liabilities, obligations or cash flows under LCR or LMR
7. Unless otherwise specified, all assets, liabilities, obligations and cash-flow items
included in the calculation of the LCR or LMR should be measured according to the

2 By virtue of section 97H(3)(d) and (e) of the BO, rule 12(1) provides that the MA, after taking into account the liquidity risk associated with a part of a locally incorporated AI’s business in or outside Hong Kong, may require the AI to calculate its LCR or LMR on the basis of that part by itself, or in conjunction with any other
part of the AI’s other business, if the MA considers it prudent and reasonable to do so. For example, in
addition to the calculation (and hence reporting) bases specified in this paragraph, the MA may require an AI to calculate the LCR or LMR covering its operations in a particular country separately. The imposition of any such additional calculation (and hence reporting) basis will only be required when the MA envisages a genuine need therefor having regard to the AI's liquidity risk profile.

MA(BS)1E / P.4 (01/2020)
“trade-day approach” on the basis of their “principal amount” as defined in the BLR. 3 To elaborate further– (i) for the purposes of calculating the LCR, the “principal amount” of any marketable asset included as a “high quality liquidity asset” (HQLA) should be measured at fair value irrespective of the applicable accounting standards. The principal amount of other on-balance sheet assets and liabilities and associated cash flows should be the book value (including any accrued interest 4 ) as determined according to the applicable accounting standards. For off-balance sheet items, the principal amount means the contracted amount or, in the case of an undrawn or partially drawn facility, the undrawn amount; (ii) for the purposes of calculating the LMR, the “principal amount” of any gold bullion, marketable debt security or prescribed instrument, or listed ordinary share included as a “liquefiable asset” should be measured at fair value irrespective of the applicable accounting standards, whilst other assets, liabilities, obligations and cash-flow items included in the calculation are measured at book value (including any accrued interest 5 ) as determined according to the applicable accounting standards. Reporting currencies
8. Unless specified otherwise, the figures to be reported in this Return should be rounded
up to the nearest thousand in Hong Kong dollars (HKD), or HKD equivalent in the case of foreign currency items. The closing middle market T/T rates prevailing at the close of business on the position date should be used for conversion purposes.
9. Reporting institutions are required to provide a breakdown of the reported amount of
individual components of the LCR or LMR in the following currencies:
Components of LCR Components of LMR
 HKD
 US dollars (USD)
 HKD
 US dollars (USD)

3 The meaning of “principal amount” of an asset, liability, obligation or cash-flow item for LCR purposes is provided in rule 17. The meaning of this term for LMR purposes is provided in rule 48(8). 4 The term “accrued interest” means the amount of interest accrued on an asset, liability, obligation or cash flow up to the position date of the LCR. (To avoid doubt, if the principal amount of an on-balance sheet item is measured at fair value, it is not necessary to add accrued interest to the reported principal amount.) Apart from “accrued interest” that needs to be added to the book value of an on-balance sheet item, interest to be accrued on such an item within the LCR period (i.e. the reporting institution’s interest receivable or payable within the relevant period) should also be included in the calculation of the LCR. The treatment of interest receivable or payable differs across individual reporting items under the LCR. Please refer to CIs for specific items under the LCR. 5 “Accrued interest” under the LMR has the same meaning as this term under the LCR. The preceding footnote is also applicable for LMR purposes after necessary modifications.

MA(BS)1E / P.5 (01/2020)
 Major currencies (including euro (EUR),
Japanese yen (JPY) and pound sterling (GBP))
 renminbi (RMB)
 other currencies*
 renminbi (RMB)
 other currencies*

• If a reporting institution has significant exposures to any specific currency within
  the “other currencies” category, the institution should put in place adequate systems and procedures to ensure its ability to provide the relevant breakdown of the LCR / LMR components in that currency upon request by the MA. A currency is considered to be significant to an AI if the AI’s liabilities denominated in that currency account for 5% or more of its total liabilities (including shareholders’ funds). 6 Time horizon of LCR and LMR

10. The LCR of a category 1 institution is calculated based on a time horizon of 30
    calendar days (the LCR period). For the purposes of calculating the LCR at a specific position date, the LCR period refers to the 30 calendar days immediately following that date. The LMR of a category 2 institution is calculated based on a time horizon of one calendar month (the LMR period). For the purposes of calculating the LMR at a specific position date, the LMR period refers to the calendar month immediately following that date. Determination of “remaining term to maturity”
11. In determining whether the maturity date of an asset, liability, obligation or cash-flow
    item is expected to fall within the LCR period or LMR period, reference should be made primarily to its contractual terms unless otherwise specified. For example, if there are options for prepayment or deferred payment embedded in the contractual terms that may alter the contractual maturity date of an asset, liability, obligation or cash-flow item, for the purposes of determining its remaining term to maturity (or its earliest possible maturity date) under the LCR or LMR, the reporting institution should adopt the following approach:

6
In applying this benchmark to assess whether an AI has significant exposures to individual currencies on the Hong Kong office basis, the AI should conduct the assessment by reference to the “total liabilities” figure reported by it in item 11 of the monthly “Return of Assets and Liabilities of an Authorized Institution” (Form MA(BS)1). This assessment should be conducted by all AIs monthly. If a locally incorporated AI has any overseas branch or specified associated entity, the AI should also assess periodically whether it has significant exposures to individual currencies on an unconsolidated basis or consolidated basis (or on both bases). This assessment on an unconsolidated basis should be based on the “total liabilities” figure reported by the AI in item 11 of the quarterly return “Combined Return of Assets and Liabilities of an Authorized Institution” (Form MA(BS)1B). The frequency of assessment should therefore be quarterly. For the assessment on a consolidated basis, a locally incorporated AI may measure the “5%” benchmark by reference to its consolidated total liabilities (including shareholders’ funds) published in its latest financial statements. This assessment on a consolidated basis should be conducted semi-annually once the required consolidated “total liabilities” figure is available.

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(i) If the reporting institution’s counterparty has an option to defer payment in relation to an asset (or a cash inflow arising from the asset) to the institution beyond the LCR period or LMR period, the institution should assume that the option will be exercised and should not count the asset (or the cash inflow) in the LCR or LMR. If however the institution has an option to advance payment in relation to an asset (or a cash inflow arising from the asset) from its counterparty within the LCR period or LMR period, it should assume that the option is not exercised, unless the institution has actually notified its counterparty that it will exercise the option. (ii) If the reporting institution has an option to advance payment in relation to a liability or obligation (or a cash outflow arising from the liability or obligation) to the counterparty such that the payment date falls within the LCR period or LMR period and there is market expectation that the institution will exercise the option, the institution should assume that the option will be exercised and should count the liability or obligation (or the associated cash outflow) in the LCR or LMR. 7 If however the institution has an option to defer payment in relation to a liability or obligation (or the associated cash outflow), it should assume that the option is not exercised, unless the institution has actually notified its counterparty that it will exercise the option. No double counting of reported items
12. Any asset, liability, obligation or cash-flow item included in the calculation of the
LCR or LMR for reporting in this Return should not be double counted. For example, (i) in the case of the LCR, if an asset is included in the reporting institution’s HQLA (numerator), any cash inflow associated with the asset (e.g. arising from the maturity of the asset within the LCR period) cannot be included in the institution’s total net cash outflows (denominator). Similarly, in the case of the LMR, an asset included in the institution’s liquefiable assets (numerator) cannot be deducted from the institution’s qualifying liabilities (denominator) even if the asset is due to mature within the LMR period; and (ii) where a liability or funding obligation of the reporting institution arising from a transaction can potentially be included in more than one type of expected cash outflow under the LCR (or qualifying liability under the LMR), it is not necessary for the institution to include such liability or obligation in the calculation of each and every applicable type of expected cash outflow under

7 This treatment takes into account the possible interaction between an AI and its creditors. For example, if the liability or obligation of an AI is callable at its discretion (e.g. in the case of a debt security issued by the AI) and the market expects the AI to exercise the option, there may be a case for assuming that the AI will indeed exercise the option for reputation reasons (otherwise the market may perceive the AI as having liquidity problems).

MA(BS)1E / P.7 (01/2020) the LCR (or qualifying liability under the LMR), provided that the outflow treatment will yield the maximum amount of expected cash outflow for such liability or obligation under the LCR (or qualifying liability under the LMR), save for situations where a specific outflow treatment is clearly prescribed in the BLR. 8

8 For example, a category 1 institution has arranged a structured financing transaction (e.g. under an asset￾backed commercial paper issuance programme) via a special purpose entity (SPE) and the institution has provided a committed liquidity facility to the SPE or any associated entity (say, in order to cater for the possible needs for the SPE to redeem the structured financial instrument issued under that transaction or to support an associated entity to act as a market-maker for the instrument). If the financial instrument issued by the SPE will mature within the LCR period and therefore the expected cash outflow arising from the redemption of the instrument is reported in item B17 of Section (I) under Part 2 of this Return, the institution does not need to report the committed liquidity facility associated with this structured financing transaction in item B19 or item B21 of Section (I) under Part 2 of this Return.

MA(BS)1E / P.8 (01/2020)
SPECIFIC INSTRUCTIONS
PART 1: SUMMARY CERTIFICATE OF LIQUIDITY POSITION
Section (I) : Summary of information on Liquidity Coverage Ratio
13. If the reporting institution is a category 1 institution, complete items 1.8 and 1.9 (the
highest and the lowest LCR during the reporting period respectively) and item 1.10 (the lowest level of HKD-denominated HQLA (level 1 assets) as a percentage of HKD￾denominated total net cash outflows (before application of 75% inflow ceiling) during the reporting period). The other information included in this Section will be generated automatically from that reported by the institution in Part 2 of this Return. Item 1.8 (together with item 1.9) enables the MA to monitor the variation of the level of LCR during the reporting period. Item 1.9 enables the MA to monitor whether a category 1 institution complied with the minimum level of LCR required under rule 4 during the reporting period. Item 1.10 enables the MA to monitor whether a category 1 institution, which is a “rule 37 institution” (as defined in rule 36), complied with the requirements in rule 37(d) that it held at least an amount of HKD-denominated level 1 assets that was not less than 20% of its HKD-denominated total net cash outflows (before application of the 75% inflow ceiling) during the reporting period. For the purposes of this item, the amount of HKD-denominated level 1 assets should be calculated before adjustments of the 15% ceiling on level 2B assets and 40% ceiling on the sum of level 2A and level 2B assets. Please refer to the explanatory note provided in item A6 in Section (I) under Part 2 of this Return and Annex 1.
Section (II) : Summary of information on Liquidity Maintenance Ratio
14. If the reporting institution is a category 2 institution, complete item 2.7 “Lowest LMR
during the reporting period”
9
. The other information required in this Section will be generated automatically from that reported by the reporting institution in respect of its LMR position in Part 3 of this Return.

9
Item 2.7 should be the lowest LMR level calculated by the reporting institution covering all working days during the reporting period, irrespective of whether the institution is allowed to calculate its average LMR, for the purposes of rule 7, by reference to specific days approved by the MA under rule 48(2). This figure will enable the MA to monitor a category 2 institution’s liquidity position throughout the reporting period in a more comprehensive manner.

MA(BS)1E / P.9 (01/2020)
PART 2: LIQUIDITY COVERAGE RATIO
General requirements for reporting of LCR
Inclusion of assets as HQLA
15. The reporting institution should only report in its stock of HQLA any asset that fulfils
the following requirements:
(i) the asset falls within a class of assets specified in Schedule 2 to the BLR and meets the qualifying criteria applicable to that class of asset as specified in the
Schedule;
(ii) the asset satisfies the characteristic requirements specified in Schedule 3 to the BLR, and the operational requirements specified in Schedule 4 to the BLR that are applicable to the asset; (iii) the institution satisfies the operational requirements specified in Schedule 4 to the BLR that are applicable to the institution in so far as those requirements relate to the asset.
16. If an asset held by the reporting institution is eligible for inclusion as HQLA and the
asset is due for redemption within the LCR period, report the asset as HQLA instead of as a cash inflow. If, however, the asset no longer qualifies as HQLA, report the asset as a cash inflow (measured at book value, including accrued interest) plus any interest receivable upon redemption. To avoid doubt, any asset lent by the institution to a third party (or borrowed from a third party) on an uncollateralized basis (e.g. the asset lending or borrowing transaction is not conducted under a repo-style transaction) cannot be counted as the institution’s HQLA in any circumstance.
17. Pursuant to rules 23 and 24, if the reporting institution is incorporated in Hong Kong,
the HQLA held by the institution’s overseas branch or specified associated entity can be included under Section (I)A of this Part for the calculation of its LCR on a consolidated basis, unconsolidated basis and/or other basis specified by the MA under rule 12 (where applicable) only to the extent that the total net cash outflows of the branch or entity are also included in Section (I)B of this Part (irrespective of whether the HQLA are subject to liquidity transfer restriction). 10

10 For example, if a category 1 institution’s consolidated group member has –

• HQLA of $1000; and
• total net cash outflows of $600, which is included in the calculation of the institution’s LCR,
  a portion of the member’s HQLA (up to $600) can be included in the institution’s consolidated stock of HQLA according to rule 23(1) even if that portion of HQLA is subject to liquidity transfer restriction. (This example is applicable even if the minimum requirement of the LCR is less than 100% during 2015 to 2018.)

MA(BS)1E / P.10 (01/2020)
18. If however the branch or entity is holding any “surplus HQLA” (as defined in rule
23(4)), any such surplus HQLA included in Section (I)(A) of this Part must meet the conditions set out in rule 23(2), including (i) the free transferability at all times of the surplus HQLA to the institution’s Hong Kong office; and (ii) the absence of any liquidity transfer restriction affecting, or of any reasonable doubt about, the free transferability of the surplus HQLA. 11 Determination of risk-weights for marketable debt securities
19. For the purposes of reporting the amount of marketable debt securities under sub-items
A1(c), A1(d), A1(e) and A2(a) in Section (I) of this Part, the risk-weights applicable to those debt securities are to be determined under the standardized (credit risk) approach (STC Approach) prescribed in the following sections under Part 4 of the Banking (Capital) Rules (BCR) 12:
Marketable debt securities issued or guaranteed by:
Applicable provisions in BCR for determining the risk-weight:
 Sovereigns or central banks  Section 55(2)  Public sector entities  Section 57  Relevant international organizations  Section 56(4)  Multilateral development banks  Section 58 For LCR purposes, EF debt securities are to be treated as if they were issued by a central bank (i.e. determining the risk-weight under section 55(2) of the BCR). Reporting of net positions in marketable debt securities
20. Generally speaking, a marketable debt security reported as HQLA by the reporting
institution should be net of the institution’s short position in that security. If the institution is carrying a net short position in a security, no long position in that security

11 According to rule 23(4), surplus HQLA held by a category 1 institution’s consolidated group member refers to the amount of HQLA held by that member that is more than the higher of – (a) the member’s total net cash outflows; (b) the HQLA required to be held by the prevailing regulations applicable to that member. Using the example provided in the preceding footnote,

• if the consolidated group member is subject to a minimum LCR requirement of 100% (or a level less than
  100%), the member is regarded to have an amount of surplus HQLA equal to $400;
• if the member is subject to a minimum LCR requirement of more than 100% (e.g. 120%), the member is
  regarded to have less surplus HQLA (e.g. $280 = 1000 – max (600, 600*120%)). The member’s surplus HQLA as calculated above can be included in the institution’s consolidated stock of HQLA only if the surplus HQLA is not subject to liquidity transfer restriction. 12 As required in the 2013 BCBS LCR Document (Footnote 15), the 0% risk-weight applicable to level 1 assets cannot be determined by national discretion under the STC Approach (as provided in paragraph 53 of the Basel II document “International Convergence of Capital Measurement and Capital Standard”, which is available at: http://www.bis.org/publ/bcbs128.pdf). The same principle applies to the 20% risk-weight applicable to level 2A assets.

MA(BS)1E / P.11 (01/2020) should be reported as HQLA. Instead, the institution should report the net short position as a cash outflow under item B22 in Section (I) of this Part.
21. For example, if the reporting institution has the following positions in debt securities
which are eligible for recognition as HQLA:
Long Short Net Long (Net Short)
Debt Security A $900 $300 $600
Debt Security B 500 750 (250)
The institution may recognise $600 net long position in Debt Security A as HQLA. The net short position ($250) in Debt Security B should be reported as cash outflow under item B22 in Section (I) of this Part. However, if the reporting institution is a market maker of EF debt securities, it can only recognise its net long position in EF debt securities as HQLA. In the above example, if Debt Security A and Debt Security B are both EF debt securities (e.g. in different tenors) held by the institution as a market maker, the net long position in all such securities ($350 =$600 – $250) should be reported as HQLA by the institution. No cash outflow should therefore be reported in respect of the net short position in Security B ($250). Transactions with obligations for delivery of collateral
22. If the reporting institution has entered into a transaction whereby the institution has an
obligation to deliver an amount of assets as collateral to the counterparty by selecting from a list of allowable assets, and the institution has not actually decided what type of asset is to be delivered, the institution should, for the purposes of calculating the expected cash outflow arising from this obligation to deliver collateral to the counterparty for reporting in this Part, assume that it would select assets within the allowable list in a descending order of the level of haircut applicable to the assets in the list. If the list contains the following types of asset, the order of selection would be – 1 st: assets that do not qualify as HQLA; 2 nd: level 2B assets that are not approved RMBS; 3 rd: approved RMBS; 4 th: level 2A assets; and 5 th: level 1 assets.
23. If the allowable list includes assets denominated in different currencies and the
reporting institution has not actually decided which assets are to be delivered, the institution may, for the purposes of completing the currency-specific columns in the templates, assume that the order of selection would be – 1 st: assets denominated in “other currencies”; 2 nd: assets denominated in RMB;

MA(BS)1E / P.12 (01/2020)
3 rd: assets denominated in “other major currencies” (i.e. EUR, JPY and GBP); 4 th: assets denominated in USD; and 5 th: assets denominated in HKD.
24. In the case of a securities swap transaction where the reporting institution’s
counterparty is also obliged to deliver an asset to the institution by selecting from a list of allowable assets, the above assumptions on selection of assets are also applicable to the institution’s counterparty. (Please refer to the CIs for items B9 and C3 in Section (I) of this Part.) Cash flows arising from forward contracts and transactions awaiting settlement
25. Cash flows arising from forward contracts should be treated under the LCR according
to the CIs provided in Annex 2. Cash flows arising from transactions conducted by the reporting institution and awaiting settlement within the LCR period can be treated by reference to paragraph 4 of Annex 2, unless specified otherwise. Pledged deposits
26. Consistent with rule 41(2), a pledged deposit placed with the reporting institution by a
customer (other than a bank) that is contractually pledged to the institution as collateral to secure a loan from the institution may be excluded from the institution’s total expected cash outflows to be reported under Section (I)B of this Part, provided that the following conditions are met:
(i) the loan will not be settled within the LCR period; (ii) the pledge arrangement is subject to a legally enforceable contract that effectively disallows withdrawal of the deposit before the loan is fully settled; and (iii) the amount of deposit to be excluded does not exceed the outstanding balance of the loan.
27. The above reporting treatment does not apply if the pledged deposit is pledged as
collateral against an undrawn credit facility, in which case the reported amount of expected cash outflow that relates to that deposit or facility should be calculated based on the higher of the outflow rates that are respectively applicable to the deposit or facility as if the deposit were not a pledged deposit (re rule 41(3)).
28. If a pledged deposit is pledged as collateral against a partially drawn credit facility (re
rule 41(4)) –
(i) the reporting treatment under paragraph 26 applies to the drawn portion of the facility; and

MA(BS)1E / P.13 (01/2020)
(ii) the reporting treatment under paragraph 27 applies to the undrawn portion of the facility. Deposits taken by deposit-taking companies
29. Where the reporting institution (or its specified associated entity in case of a locally
incorporated institution) is a deposit-taking company (DTC), the reporting of deposits taken by the DTC under Section (I)B of this Part should follow the CIs set out in
Annex 4.
Specific requirements for reporting of LCR
Section (I): Liquidity Coverage Ratio (Month-end position)
30. In this Section, a category 1 institution should report the components of its LCR based
on its month-end position in accordance with the CIs set out below. The post-haircut factor applicable to each HQLA item, outflow rate applicable to each cash outflow item, and inflow rate applicable to each cash inflow item, are specified as “Weight” under Column 4 of the reporting templates in Section (I)A, (I)B and (I)C of this Part respectively. The reporting institution should apply these weights for calculating the weighted amounts of HQLA, total expected cash outflows and total expected cash inflows for the purposes of reporting the LCR.
Section (I)
Ref. no.
A. HIGH QUALITY LIQUID ASSETS (HQLA)
Assets reported as HQLA by the reporting institution should meet all relevant qualifying requirements referred to in paragraph 15, and other applicable requirements set out in paragraphs 16 to 24, of these CIs. A1 Level 1 assets A1(b) Withdrawable central bank reserves Report in this sub-item the book value (including accrued interest) of any funds placed by the reporting institution with the MA for the account of the Exchange Fund that are repayable on demand; or any of the following funds placed by the reporting institution with a central bank whereby the funds are – (i) repayable on demand; (ii) term funds that are explicitly and contractually repayable on notice (which expires on the first day of the LCR period) from the institution; and

MA(BS)1E / P.14 (01/2020)
(iii) term funds against which the institution can borrow from the central bank a loan on a term basis (or on an overnight but automatically renewable basis). If the amount of the loan that the institution may borrow from the central bank against the term funds concerned and the amount of the funds are different, report the lower of those two amounts. If the reporting institution carries on a banking business in an overseas country which is subject to reserve requirements imposed by the central bank in that country, the reserves placed with the central bank may be reported in this sub-item only if – (i) the reported amount is the portion of funds placed with the central bank that exceeds minimum reserve requirements and hence is repayable on demand; or (ii) the reported amount is the portion of the required reserves that is allowed by the central bank to be drawn down by the institution in times of financial stress. This should be supported by reliable evidence 13 that can effectively confirm the extent to which the required reserves placed by the institution are able to be withdrawn in times of stress. RMB funds placed with the reporting institution’s RMB Fiduciary Account opened with the People’s Bank of China (PBoC) through the RMB Clearing Bank can be regarded as funds placed with an overseas central bank and hence be reported in this sub-item, subject to the funds meeting the relevant qualifying requirements for recognition as HQLA. (Please refer to Part 7 of, and Schedules 2 to 4 to, the BLR for the details of the relevant qualifying requirements.) A1(c) to (e) Marketable debt securities recognised as level 1 assets A1(c) Report in this sub-item the fair value of marketable debt securities that comply with the requirements specified in Schedule 2 (section 1(c) of Part 2 and section 1 of Part 3) to the BLR. In particular, these debt securities must be issued or guaranteed by a sovereign, central bank, public sector entity, relevant international organization or multilateral development bank, or that are EF debt securities, and qualify for a risk￾weight of 0% under Part 4 (STC approach) of the BCR. A1(d) Report in this sub-item the fair value of marketable debt securities that comply with the requirements specified in Schedule 2 (section 1(d) of Part 2 and section 2 of Part 3) to the BLR. In particular, these debt securities must be issued by the sovereign or

13 “Reliable evidence” may include, for example, a public policy statement announced by the central bank or relevant authority in the host country in which the institution’s consolidated group member is operating, a notice or confirmation letter issued by the central bank or relevant authority in that host country to that member, or any other official document that can effectively verify that the reserves concerned are truly withdrawable in stressed conditions. The institution should be able to present the evidence to the MA upon request. If necessary, the MA may directly confirm with the central bank or relevant authority in that host country.

MA(BS)1E / P.15 (01/2020) central bank of a country and denominated in the local currency of the country, or must be EF debt securities, and which – (i) do not qualify for a 0% risk-weight under Part 4 (STC approach) of the BCR (i.e. section 55(2)) (hence do not qualify for inclusion in sub-item A1(c)); or (ii) qualify for a 0% risk-weight only by virtue of section 56(1) or (2) of the BCR provided that the institution is incorporated, or carries on a banking business through a branch or consolidated entity, in the country. 14 A1(e) Report in this sub-item the fair value of marketable debt securities that comply with the requirements set out in Schedule 2 (section 1(e) of Part 2 and section 3 of Part 3) to the BLR. In particular, these debt securities must be issued by the sovereign or central bank of a country and meet the criteria set out for item A1(d) except that the debt securities are denominated in a currency that is not the local currency of the country in which the reporting institution is incorporated or carries on a banking business through a branch or consolidated entity. The amount of debt securities reported in this sub￾item should not exceed the amount of total net cash outflows in the non-local currency (in which the debt securities are denominated) arising from the institution’s banking business in the country. 15 A2 Level 2A assets A2(a) Report in this sub-item the fair value of marketable debt securities that comply with the requirements set out in Schedule 2 (section 2(a) of Part 2 and section 4 of Part 3) to the BLR. In particular, these debt securities must be issued or guaranteed by a sovereign, central bank or public sector entity, and which qualify for a 20% risk￾weight under Part 4 (STC approach) of the BCR, but which do not qualify for inclusion as level 1 assets in sub-item A1(d) or A1(e) 16 .

14 For example, if the reporting institution is incorporated in Country A or maintains a branch or consolidated entity in Country A, the institution can recognise a non-0% risk-weight debt security issued by the sovereign or central bank in Country A in its local currency as a level 1 asset under this sub-item, provided that other qualifying criteria are met. If the institution’s branch or consolidated entity ceases to operate in Country A, the debt security concerned will no longer be eligible for recognition as a level 1 asset under this sub-item. In this situation, whether the debt security can be recognised as HQLA under another asset class (e.g. as a level 2A asset under sub-item A2(a)) will depend on its compliance with the qualifying criteria applicable to any other asset class. 15 Using the example provided in the preceding footnote, if the debt security concerned is denominated in a foreign currency (e.g. “currency B”) which is not the local currency of Country A, the reporting institution can recognise the debt security as level 1 HQLA under sub-item A1(e) up to an amount not exceeding the total net cash outflows of the institution in currency B (arising from the banking business conducted by the institution in Country A). 16 Pursuant to section 2(2) and section 3(2) of Part 3 of Schedule 2 to the BLR, category 1 institutions are allowed to report marketable debt securities that qualify for inclusion under both sub-item A1(d) (or A1(e)) and sub-item A2(a) as level 1 assets under sub-item A1(d) (or A1(e)).

MA(BS)1E / P.16 (01/2020)
A2(b) Report in this sub-item the fair value of marketable debt securities that comply with the requirements set out in Schedule 2 (section 2(b) of Part 2 and section 5 of Part 3) to the BLR. In particular, these debt securities must be issued by corporates and assigned with a credit quality grade of 1 under Part 4 (STC approach) of the BCR.

The credit quality grade of a corporate debt security (or a covered bond in the case of sub-item A2(c)) is determined by either one of the following approaches:
(i) if the debt security (or covered bond) has an ECAI issue specific rating, map the rating to Schedule 6 to the BCR for determining the credit quality grade 17; or (ii) if the debt security (or covered bond) does not have an ECAI issue specific rating and the reporting institution holding the debt security is approved by the MA to use the IRB approach under section 8 of the BCR (if the institution is incorporated in Hong Kong) or by the institution’s home supervisor (if the institution is incorporated outside Hong Kong) to use the internal ratings-based approach that reflects the standards of the BCBS to calculate capital charge for credit risk, use the institution’s internally rated probability of default for the debt security as a reference for determining the credit quality grade. A2(c) Report the fair value of covered bonds that comply with the requirements set out in
Schedule 2 (section 2(c) of Part 2 and section 6 of Part 3) to the BLR. In particular,
the covered bonds reported in this sub-item must qualify for a credit quality grade of 1 under Part 4 (STC approach) of the BCR by following the CIs provided for sub-item A2(b). A3 Level 2B assets A3(a) Report in this sub-item the fair value of marketable debt securities that comply with the requirements set out in Schedule 2 (section 3(a) of Part 2 and section 7 of Part 3) to the BLR. In particular, this item covers those debt securities which are –  issued by corporates and assigned with a credit quality grade of 1, 2 or 3 (if
section 7(1)(a) or (b)(i) of Part 3 of Schedule 2 to the BLR is applicable); or 1, 2, 3
or 4 (if section 7(1)(b)(ii) of Part 3 of Schedule 2 to the BLR is applicable); or  issued by sovereigns, central banks or public sector entities, and assigned with a credit quality grade of 1, 2 or 3 (if section 7(1)(ba) or (bb) of Part 3 of Schedule 2 to the BLR is applicable). 18, 19

17 In brief, a corporate debt security or a covered bond that can be recognised as a level 2A asset must have a long-term ECAI issue specific rating of AA- or better. In the case of a corporate debt security (e.g. commercial paper) that does not have a long-term ECAI issue specific rating, that security must have a short￾term ECAI issue specific rating representing a comparable level of credit quality.

MA(BS)1E / P.17 (01/2020)
A3(b) Report in this sub-item the fair value of listed ordinary shares that comply with the requirements set out in Schedule 2 (section 3(c) of Part 2 and section 10 of Part 3) to the BLR. 20 A3(c) Report in this sub-item the fair value of any RMBS that comply with the requirements set out in Schedule 2 (section 3(b) of Part 2 and sections 8 and 9 of Part 3) to the BLR. In particular, the RMBS reported in this sub-item must have been approved by the MA (under section 9 of Part 3 of Schedule 2 to the BLR) for the reporting institution to include those securities as level 2B assets. 21

A5 Deduction: Adjustments for 15% ceiling on level 2B assets and 40% ceiling on sum of level 2A and level 2B assets Complete Table 1 of Section (II) of this Part according to the CIs provided in Annex 3, including adjustments before and after the reversal by the reporting institution of any relevant securities financing transaction, which requires the institution to exchange with its counterparty, during the LCR period, an asset in its stock of HQLA for another asset, both of which are eligible for inclusion as HQLA. 22
Table 1 will
generate the required figures for this item.
A6 Deduction: foreign exchange haircuts (if BLR rule 37 is applicable) The figure to be reported under this item is generated automatically provided that the reporting institution fulfils the conditions set out in rule 37, including, among others, the institution’s holding of HKD-denominated HQLA (level 1 assets) is not less than 20% of its HKD-denominated total net cash outflows. A numerical example is provided in Annex 1 to demonstrate the calculation of the additional adjustment due

18 In brief, a marketable debt security that can be recognised as a level 2B asset must have a long-term ECAI issue specific rating of BBB-or above. In the case of a marketable debt security (e.g. commercial paper) that does not have a long-term ECAI issue specific rating, that security must have a short-term ECAI issue specific rating representing a comparable level of credit quality. 19 If a marketable debt security cannot meet all criteria for inclusion as HQLA at a higher level, it may still be possible for inclusion as HQLA at a lower level provided that all applicable criteria for that level are satisfied. For example, a marketable debt security issued by a corporate with a credit quality grade of “1” but having a historical record of price decrease exceeding 10% at any time within a 30-day period cannot be recognised as level 2A assets. However, it may still be recognised as level 2B assets if its price has not decreased by more than 20% within any 30-day period, and all other applicable criteria for level 2B assets are satisfied. 20 If the institution has taken liquidity risk in a particular country (e.g. having an operation in that country through a branch or subsidiary), the eligible overseas ordinary shares listed in that country can also be booked in the institution’s Hong Kong office if the Hong Kong office is the booking centre for the institution’s overseas exposures. 21 Please refer to Annex 2 of SPM module LM-1 for further guidance on the treatment of RMBS under the LCR. 22 This means that all relevant requirements set out in rule 25 are met by the assets concerned, or by the institution holding the asset insofar as those requirements relate to the asset, when the asset is held by the institution.

MA(BS)1E / P.18 (01/2020) to foreign exchange haircuts, which will be transposed to item A6 of Section (I) of this
Part.
B. TOTAL EXPECTED CASH OUTFLOWS 23
B1 Retail deposits taken by Hong Kong office
Report in item B1 the book value (including accrued interest) of retail deposits taken by the reporting institution in its Hong Kong office. Interest to be accrued (and payable by the institution) within the LCR period should also be reported in this item. Provide a breakdown of these deposits by (i) stable retail deposits; (ii) less stable retail deposits; and (iii) retail term deposits. For stable retail deposits, insert an outflow rate of 3% under the “weight” column of item B1(a) if the reporting institution has put in place and maintained effective systems and procedures to ensure compliance with all requirements set by the Hong Kong Deposit Protection Board (HKDPB) to facilitate swift operation of the Deposit Protection Scheme. (Such requirements may include, for example, timely submission of information in accordance with the requirements set out in the Guideline on Information Required for Determining and Paying Compensation issued by the HKDPB.) Otherwise, insert an outflow rate of 5% in item B1(a) if the institution cannot meet the HKDPB’s requirements, or is specifically required to do so by the MA. If a time deposit taken by a category 1 institution from a retail customer cannot meet the criteria (or if the institution is unable to ascertain whether a time deposit can meet the criteria) for being classified as a “retail term deposit”, the deposit must be treated as a less stable retail deposit if it cannot satisfy the criteria for being classified as a “stable retail deposit”. For the purposes of reporting the breakdown of a deposit item by currency, if a retail customer has placed deposits denominated in more than one currency with the reporting institution and these deposits are covered by an effective deposit insurance scheme (EDIS), assume that the EDIS covers these deposits in the order of (i) HKD deposits; (ii) USD deposits; (iii) deposits denominated in other major currencies (i.e. EUR, JPY and GBP); (iv) RMB deposits; and (v) deposits denominated in other currencies. (This assumption is also applicable to items B3 to B6, where deposit insurance coverage is also a relevant factor affecting the calibration of these items.) B2 Retail deposits taken by overseas offices Item B2 is applicable to locally incorporated reporting institutions whose overseas offices (e.g. overseas branches or overseas specified associated entities) have taken

23 Please refer to the guidance provided in subsection 5.8 of SPM module LM-1.

MA(BS)1E / P.19 (01/2020) retail deposits, for the purposes of reporting their LCR on an unconsolidated basis, consolidated basis and/or other basis specified by the MA under rule 12 (where applicable). Unless rule 22(3) or (4) applies, the expected cash outflow arising from those overseas retail deposits is calculated in accordance with the liquidity requirements applicable to such deposits imposed by the relevant banking supervisory authority of the host country concerned in which the deposits are taken. Report in item B2 the aggregate book value (including accrued interest) of, and the aggregate expected cash outflows arising from, retail deposits taken by all overseas offices of the locally incorporated reporting institution. Any interest to be accrued (and payable by the institution) within the LCR period should also be reported in this item. The following is an illustration of how item B2 should be reported assuming that the reporting institution takes stable retail deposits in two overseas countries:
Principal amount of stable retail deposits taken by an institution’s overseas offices Outflow rates applicable in the relevant country Country A USD1000 (equiv. HKD7800) 3% Country B EUR200 (equiv. HKD2000) 5% Sub-item B2(a) should be reported as follows:
Principal amount
Weight Weighted amount
Breakdown of weighted amount by currencies
HKD USD Other major $ RMB Other $
2 Retail deposits taken by overseas offices
(a) stable retail deposits 9800 334 234
=78003%
100
=20005%
B3, B4 Small business funding
Report in items B3 (or B4) the book value (including accrued interest) of small business funding obtained by the reporting institution in accordance with the CIs for items B1 (or B2), as if such funding is akin to retail deposits taken by the reporting institution’s Hong Kong office (or overseas office as the case may be). B5 Operational deposits Report in this item the book value (including accrued interest) of operational deposits received by the reporting institution from wholesale customers (other than small business customers), including both financial institutions and non-financial entities. Interest to be accrued on these deposits (and payable by the institution) within the LCR period should also be reported in this item. The deposits reported in this item must meet the qualifying criteria in relation to operational deposits provided in clause 7 of the CoP.

MA(BS)1E / P.20 (01/2020)
If the deposits taken by the reporting institution from a customer consist of both operational deposits and non-operational deposits, assume that the portion of deposits that qualifies as operational deposits will take precedence over the remaining deposits when determining the level of protection covered under an EDIS (where applicable). For example, assume that the reporting institution has taken the following deposits from customers:
(Unit: HKD’000 equivalent) Customer A
(non-FI)
Customer B
(non-FI)
Customer C
(non-FI)
Customer D
(FI)
Operational deposits that comply with clause 7 of CoP 700 500 150 400 Other deposits not regarded as operational deposits 300 250 350 200 Total 1,000 750 500 600 The deposits are insured under an EDIS up to HKD500,000 equivalent per a customer’s total eligible deposits placed with the institution. The reporting institution should report the above deposits in item B5 (and item B6) as follows:
(Unit: HKD’000 equivalent)
Customer A Customer B Customer C Customer D
5 Operational deposits
(a) fully insured by an effective deposit insurance scheme 500 500 150 400 (b) not covered under sub-item B5(a) 200 (c) Memorandum item: Excess operational deposits (excluded from sub-item B5(a) or B5(b)) 300 250 350 200 6 Unsecured wholesale funding (a) (other than operational deposits) provided by corporates, etc. (i) amount entirely protected by EDIS 0 0 350 0 (ii) not covered under sub-item B6(a)(i) 300 250 (b) other than funding mentioned in item B3, B4, B5 or sub-item B6(a) 0 200 For sub-item B5(a), the outflow rate should be the same as that used by the reporting institution in sub-items B1(a) and B3(a). Report in sub-item B5(c), as a memorandum item, excess operational deposits (excluded from sub-item B5(a) or B5(b)). As demonstrated in the above example, this portion of deposits should be included in item B6. B6 Unsecured wholesale funding (other than operational deposits) Report the book value (including accrued interest) of unsecured whole funding (other than operational deposits) in this item according to the CIs below. Interest to be

MA(BS)1E / P.21 (01/2020) accrued on such funding (and payable by the institution) within the LCR period should also be included. Sub-item B6(a) covers unsecured wholesale funding (other than operational deposits) provided by corporates (other than small business customers), sovereigns, the MA for the account of the Exchange Fund, central banks, multilateral development banks and public sector entities. Report the funding concerned in two separate components:
(i) report in paragraph (i) the funding provided by customers captured in this sub￾item the entire amount of which is fully insured by an EDIS; and (ii) report in paragraph (ii) the funding provided by customers captured in this sub￾item the entire amount of which is not fully insured by an EDIS. Hence, if a customer provides funding of $800,000 to the reporting institution but the EDIS concerned provides full protection only up to $500,000 of a customer’s eligible deposits, the entire amount ($800,000) does not fall within paragraph (i) and has to be reported in paragraph (ii) of this sub-item. Report in sub-item B6(b) unsecured wholesale funding other than funding covered under item B3, B4, B5 or B6(a). This means that this sub-item does not include small business funding, operational deposits, and unsecured wholesale funding provided by wholesale customers (excluding small business customers). The customers covered in this sub-item may include, for example, financial institutions, fiduciaries 24 , beneficiaries 25, conduits and SPEs engaged in structured financing transactions, and any of the reporting institution’s associated entities which is not a financial institution. Unsecured wholesale funding received by the institution in the course of providing correspondent banking and prime brokerage services should also be reported in this sub-item. 26 In addition, this sub-item should include unsecured wholesale funding (other than small business funding) received by the reporting institution (or its specified associated entity), if the institution (or that entity) is a DTC that is not subject to section 12(3) of the BO by virtue of the MA’s written permission to early repay the funding concerned (see Annex 4 for details).

24 The term “fiduciary” means a legal entity that is authorized to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. (Please refer to Footnote 43 of the 2013 BCBS LCR Document.) 25 The term “beneficiary” means a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity trust or other contract. (Please refer to Footnote 44 of the 2013 BCBS LCR Document.) 26 As provided in clause 9 of the CoP, if a category 1 institution has received from customers any unsecured wholesale funding in the course of providing prime brokerage services to those customers and the funding is withdrawable within the LCR period, the entire amount of that funding is included in this sub-item, irrespective of whether the institution has maintained, or is required to maintain, all or any portion of the funding in segregate accounts for the protection of customer assets.

MA(BS)1E / P.22 (01/2020)
B7 Debt securities and prescribed instruments issued by the reporting institution and redeemable within the LCR period Report in this item the book value (i.e. the amount that is contractually redeemable upon maturity, including accrued interest) of debt securities and prescribed instruments issued by the reporting institution which are redeemable within the LCR period, irrespective of the type of investors holding these securities and instruments. Interest to be accrued on these securities and instruments (and payable by the institution) within the LCR period should also be reported in this item. To avoid doubt, this item does not cover the redemption of asset-backed securities, covered bonds or other structured financial instruments issued by the reporting institution within the LCR period. The expected cash outflow arising from the redemption of such instruments should be reported in item B17. B8 Secured funding transactions (other than securities swap transactions) Report in this item the book value (including accrued interest, if any) of money payable by the reporting institution within the LCR period arising from maturing secured funding transactions (which are not securities swap transactions). Breakdown the money payable by type of counterparty and/or the type of collateral 27 posted by the institution to the counterparty as required. The specific currency columns should be reported based on the currency denomination of the money payable by the institution (irrespective of the currency denomination of the underlying collateral). 28 If the reporting institution has entered into a securities lending transaction under which the institution lends its own securities to the counterparty to cover the latter’s short positions in equivalent securities and receives a sum of money from the counterparty in exchange, the expected cash outflow arising from the transaction should be included under this item. If, however, the securities lent by the institution to the counterparty are obtained from another counterparty as collateral, and the securities do not qualify as HQLA, the expected cash outflow arising from the transaction should instead be included under item B21 as “other contingent funding obligations” (please refer to the CIs for item B21 for details).

27
As provided in clause 11(3) of the CoP, a secured funding transaction (other than a securities swap transaction) entered into by a category 1 institution is not regarded as being collateralized by an asset that falls within level 1 assets, level 2A assets, approved RMBS or other level 2B assets unless that asset satisfies the requirements set out in rule 25(a) and (b) that are applicable to it. 28 For example, if the reporting institution is obliged to pay an amount of money in Hong Kong dollars within the LCR period under a secured funding transaction which is collateralized by a security denominated in USD dollars, the institution should report the amount payable in the “HKD” column instead of the “USD” column.

MA(BS)1E / P.23 (01/2020)
For the purposes of reporting under sub-item B8(b), the terms “domestic public sector entity” and “foreign public sector entity” are defined in the BCR. Any public sector entity being referred to in this sub-item must qualify for a risk-weight of not exceeding 20% in the calculation of credit risk under the STC approach (in accordance with
section 57 of the BCR).
B9 Securities swap transactions
If the reporting institution has entered into a securities swap transaction that is due for settlement within the LCR period, complete Table 3 in Section (II) of this Part, which will generate the required figures for this item. In Table 3, report, in the appropriate rows, the principal amounts (measured at fair value) of securities to be delivered by the reporting institution within the LCR period under the maturing securities swap transactions it has entered into. In order to determine the row under which a particular securities swap transaction should be reported, the institution should ascertain the type of securities to be delivered by it and the type of securities to be received from the counterparty within the LCR period. 29 For example, a category 1 institution (Bank A) has incurred some positions arising from securities swap transactions conducted with its counterparty (Bank B). These transactions, as described below, are due for settlement within the LCR period. Transaction (I): To deliver a level 1 asset (HKD1000) and to receive a level 2A asset; Transaction (II): To deliver a level 2A asset (USD100, which is assumed to be equivalent to HKD780) and to receive an RMBS that has not been approved by the MA for recognition by the institution as a level 2B asset. Bank A should report its obligations to deliver securities under Transaction (I) and Transaction (II) in item (b) and item (i) of Table 3 respectively. It should complete this Table as follows, so as to generate the total weighted amount for the purposes of item B9.

29 As provided in clause 11(6) of the CoP, a security to be delivered, or received, by a category 1 institution under a security swap transaction is not regarded as a level 1 asset, level 2A asset, approved RMBS or other level 2B asset unless the security satisfies the requirements set out in rule 25(a) and (b) that are applicable to it.

MA(BS)1E / P.24 (01/2020)
(Unit: HKD’000 equivalent)
Type of securities to be delivered by reporting institution to counterparty within the LCR period Type of securities to be received by reporting institution from counterparty within the LCR period Principal amount of securities to be delivered by reporting institution Weight Weighted amount Breakdown of weighted amount by currencies HKD USD Other major $ RMB Other $ (b) level 1 assets level 2A assets 1000 15% 150 150 (i) level 2A assets assets that are not level 1 assets, level 2A assets or level 2B assets 780 85% 663 0 663 0 Total 1780 813 150 663 0 (Note: If Bank B is also a category 1 institution, it should report the expected cash inflow arising from the two securities swap transactions (i.e. Transaction (I) and Transaction (II)) in item C3 of Section (I) by completing Table 4 in Section (II).) If the reporting institution (or its counterparty) is contractually allowed to select securities from a list of allowable types of securities (with different levels of quality and liquidity value) for delivery in a securities swap transaction, and the institution (or its counterparty) has not confirmed what type of securities the institution (or its counterparty) will deliver under the transaction, the institution may assume that it (or its counterparty) will select from the list the type of securities to be delivered in the order specified in paragraph 22 of these CIs. B10 Contractual net cash outflows arising from derivative contracts Complete Table 5 of Section (II) of this Part following the CIs provided in Annex 5, if the reporting institution has any liabilities or obligations arising from derivative contracts within the LCR period. This Table will generate the required figures for cash outflow item B10 (and also cash inflow item C9) under Section (I) of this Part. B11 Derivative contracts or other transactions with material adverse event clauses If the reporting institution has entered into any derivative contract or other transaction which contains a material adverse event clause, which, if such an event occurs, will require the institution to – (i) pay a sum of money; (ii) deliver additional collateral to the institution’s counterparty; or (iii) incur any funding need arising from adverse changes in the institution’s contractual rights to re-hypothecate collateral received from the institution’s counterparty,

MA(BS)1E / P.25 (01/2020) report the sum of the contracted amounts of (i), (ii) and (iii) (or any combination of them, as the case may be) by the institution within the LCR period, as if the material adverse event were to occur within the LCR period. B12 Potential loss in market value of posted collateral securing derivative contracts or other transactions Complete Table 6 of Section (II) of this Part following the CIs provided in Annex 6, if the reporting institution has posted any asset to the counterparty as collateral under a derivative contract or other transaction 30 . Table 6 will generate the required figures for this item. B13 Excess non-segregated collateral callable by counterparty under derivative contracts or other transactions Report in this item the fair value of collateral posted to the reporting institution by a counterparty in excess of the contractually required amount if the counterparty has a unilateral right to withdraw the excess collateral on demand or within the LCR period, and the collateral received by the institution is not segregated from other assets held by the institution, meaning that the excess collateral, may be or has already been, re￾hypothecated by the institution, counted as the institution’s HQLA if the collateral is so qualified, or utilised by the institution for its other business operations. B14 Collateral substitution under derivative contracts or other transactions This item captures situations in which the reporting institution has received HQLA collateral from the institution’s counterparty under a derivative contract or other transaction, whereby the collateral is not segregated from other assets held by the institution and the counterparty has a contractual right to substitute the HQLA collateral posted to the institution by HQLA collateral of lower liquidity quality or non-HQLA collateral anytime within the LCR period. It is assumed that the counterparty will exercise the right within the LCR period by substituting the HQLA collateral by collateral of the lowest liquidity quality among the allowable types of assets to be substituted. Complete Table 7 under Section (II) of this Part, which will generate the required figures for this item. In Table 7, report, in the appropriate rows, the principal amounts (measured at fair value in the case of marketable assets) of collateral posted to the reporting institution by the counterparties under the derivative contracts or transactions concerned. In

30 This item is applicable to derivative contracts or other transactions, as long as the posted collateral is subject to market risk thus rendering a category 1 institution potentially obliged to post additional collateral to its counterparty if the collateral drops in value.

MA(BS)1E / P.26 (01/2020) determining the row under which each of those contracts or transactions should be reported, the institution should ascertain – (i) the type of HQLA collateral posted by the counterparty to the institution (Column 2 of Table 7); and (ii) the type of assets that may be posted by the counterparty to the institution for collateral substitution (Column 3 of Table 7). The type of assets under (ii) is derived by applying an order of collateral substitution in line with that specified in paragraph 22 of these CIs (to the extent allowed under the relevant contract or transaction). As an illustration, if the counterparty is contractually allowed to substitute level 1 HQLA collateral by any other collateral (which may be non-HQLA), it is always assumed that the counterparty will use non-HQLA for collateral substitution. In other words, the contract or transaction should be reported under item (e) of Table 7 with an applicable outflow rate of 100%. If, however, the type of collateral allowed to be substituted is confined to HQLA (i.e. level 1, level 2A and level 2B assets), it is assumed that the counterparty will always use level 2B assets that are not “approved RMBS” for collateral substitution. In other words, the contract or transaction should be reported under item (d) of Table 7 with an applicable outflow rate of 50%. B15 Contractual obligations to post collateral to counterparty under derivative contracts or other transactions (not otherwise covered in Section (I)B) If the reporting institution has any contractual obligation to provide collateral to its counterparty under a derivative contract or other transaction within the LCR period, report in this item the principal amount of collateral (measured at fair value in the case of marketable assets) that the institution is required to provide to the counterparty, unless this obligation is already captured under other cash outflow items in Section (I) of this Part. This contractual obligation should be reported irrespective of whether the counterparty has actually demanded the institution to provide additional collateral. B16 Increase in collateral needs arising from adverse changes in market value of derivative contracts or other transactions If the reporting institution has entered into derivative contracts or other transactions that subject the institution to collateral requirements, report in this item the estimated amount of additional collateral that has to be posted to counterparties arising from adverse changes in the market value of such contracts or transactions (Value X) by applying the formula and steps listed below:
Value X is the largest absolute value of the total cumulative amount of net collateral flow of a category 1 institution realized in any period of 30 calendar days during the

MA(BS)1E / P.27 (01/2020)
24 months preceding to the date on which the reporting institution’s LCR is calculated. It should be calculated according to the following formula:
Value X = max {| | }; where—
(a) (daily net collateral flow)n means net amount of collateral inflows or outflows on day “n” caused by changes in the fair value of derivative contracts or other transactions subject to collateral requirements; and (b) it is assumed that 24 months consist of 730 calendar days. If the reporting institution is not able to calculate Value X due to data insufficiency or any other reason, the institution should notify the MA of this inability and the reasons for it, and agree an alternative calculation method with the MA for reporting under this item. The collateral flow should include the amount of settlement payments or settlement receipts that are made in relation to market value change for derivative contracts or other transactions that are structured as settled-to-market, where the reporting institution records variation margin on cleared derivatives as settlement payments (or receipts) rather than as transfers of collateral. [Explanatory note: This elaboration is to incorporate item 1 of the BCBS FAQ issued in September 2018. (https://www.bis.org/press/p180920a.htm).] For the purposes of reporting the breakdown of Value X by currency, adopt the approximation method illustrated in the example below:
Assume the reporting institution’s Value X (on an all-currency basis) is HKD100 and that its total liabilities (including shareholders’ funds) at the end of the most recent financial disclosure period had a currency profile as follows:
Total HKD USD Other major $
RMB Other $
Total liabilities (including shareholders’ funds) 100% 60% 15% 10% 5% 10% Approximate the currency breakdown of Value X as follows:
Total HKD USD Other major $
RMB Other $
Value X 100 60
(10060%)
15
(10015%)
10
(10010%)
5
(1005%)
10
(100*10%)

MA(BS)1E / P.28 (01/2020)
B17 Repayment of funding obtained from structured financial instrument issued by the reporting institution and redeemable within the LCR period If the reporting institution has issued any asset-backed securities, covered bonds or other structured financial instruments which will mature within the LCR period, report in this item the book value (including accrued interest) of these financial instruments to be redeemed. Interest to be accrued on these instruments (and payable by the institution) within the LCR period should also be reported in this item. If the redemption of the above-mentioned securities or instruments will entitle the institution to receiving any asset that qualifies as HQLA (meaning that all the requirements in rule 25 are satisfied, or will be satisfied when the asset is received by the institution) within the LCR period, the fair value of that asset (after applying a suitable post-haircut factor specified in rule 35(1) in the case of level 2A or level 2B assets) can be deducted from, and only up to, the amount to be reported under this item. B18 Obligations for repayment of maturing debt or provision of funding or assets arising from any embedded option in structured financing transactions 31 If the reporting institution has entered into structured financing transactions (such as asset-backed commercial paper issuance programmes) with the obligations to repay any debt maturing within the LCR period under those transactions, and/or provide any funding or assets that may arise from any embedded options in those transactions within the LCR period, report in this item – (i) the book value (including accrued interest) of such maturing debt to be repaid (if not already included under item B17) and also any interest to be accrued on the maturing debt (if the payment of such interest will rely on the funding to be provided by the institution); and (ii) the funding or assets (measured at fair value in the case of marketable assets, or otherwise measured at book value (according to the CIs provided in paragraph (i)) that may need to be provided by the institution under the embedded options in the transactions. If the reporting institution conducts a structured financing transaction via a special purpose entity (which may be a special purpose vehicle, conduit or structured investment vehicle), the institution should, for the purposes of this item, treat the entity

31 This item captures expected cash outflows associated with loss of funding on structured financing transactions including asset-backed commercial paper, conduits, securities investment vehicles and other such financing activities which may result from (i) the inability to refinance maturing debt; or (ii) the existence of derivative or derivative-like components contractually written into the documentation associated with structured financing transactions that would allow the “return” of assets in a financing arrangement, or that would require the original asset transferor to provide liquidity, effectively ending the financing arrangement within the LCR period.

MA(BS)1E / P.29 (01/2020) as if it were a part of the institution irrespective of whether the entity is a specified associated entity of the institution. In other words, the institution should, in reporting this item, look through to the maturity of the debt instruments issued by the entity, and any embedded options in those instruments that may potentially trigger the need to provide funding or assets, as if those debt instruments were issued by the institution itself. B19 Potential drawdown of undrawn committed facilities Report, in Table 8 of Section (II) of this Part, the undrawn portion of committed credit facilities and committed liquidity facilities 32 that can potentially be drawn by customers of the reporting institution within the LCR period. Table 8 will generate the required figures for this item. If the reporting institution has granted a committed facility to its customer in order to provide standby liquidity support for the customer’s debt obligations, report in this item the undrawn portion of the facility as a committed liquidity facility only to the extent of the customer’s debt obligations that will mature within the LCR period and is supported by the facility. There is no need to include that portion of the facility which is backing the customer’s debt obligations that will mature beyond the LCR period. 33

However, if the facility can be drawn for other purposes (i.e. not being confined to the provision of standby liquidity support for the customer’s debt obligations), the undrawn amount of the facility in excess of the customer’s debt obligations maturing within the LCR period (representing additional capacity of the facility to support other purposes within the LCR period) should be reported as if it were a committed credit facility. 34 If the reporting institution has entered into a structured financing transaction and provided a committed liquidity facility to support that transaction, it is not necessary for the institution to include the committed liquidity facility for the purposes of this item, provided that the institution has included the structured financing transaction in

32
Please refer to the guidance provided in paragraph 5.8.21 to 5.8.26 of SPM module LM-1. 33 If the maturity date of the customer’s debt obligations may be advanced by any embedded prepayment options, such options should be taken into account by the reporting institution in determining whether the committed liquidity facility granted by the institution to cover such obligations should be included in the calculation of this cash outflow item. 34 For example, Bank A has granted a committed facility with a usable limit of $10 million to provide standby liquidity support for a customer’s debt obligations. If the customer’s debt obligations covered by this facility consist of $1 million maturing within the LCR period and $2 million maturing beyond the LCR period, Bank A should report in item B19 an undrawn amount of $1 million as a committed liquidity facility. If this facility is granted for the mentioned purpose only, Bank A does not have to report any undrawn amount as a committed credit facility. However, if this facility can be used by the customer for other purposes, Bank A should report the remaining usable portion of this facility (i.e. $10 million - $1 million = $9 million) as a committed credit facility if this remaining portion can be drawn by the customer for purposes other than debt coverage within the LCR period.

MA(BS)1E / P.30 (01/2020) the reporting of expected cash outflow under item B17 or B18 (or both), as the case may be. If the reporting institution has received (or will receive upon drawdown of a committed facility granted to a customer) collateral that qualifies as HQLA (hence meeting all the requirements set out in rule 25) to pledge against the facility, the post￾haircut fair value (i.e. after applying the post-haircut factors set out in rule 35(1)) of the HQLA collateral may be deducted from the undrawn portion of that facility if – (i) the institution is legally entitled and operationally capable of re-hypothecating the pledged asset to obtain funding once the facility is drawn, but it has not done so yet; (ii) the institution has no obligation to return the collateral to the customer or to any third party upon demand or at any time within the LCR period; (iii) to avoid double counting, the collateral is not included by the institution as HQLA for the purposes of calculating the LCR; and (iv) there is no undue correlation between the probability of drawing on the facility and any potential decline in the fair value of the collateral. In other words, the drawdown of the facility is not expected to have material impact on the fair value of the asset. For the purposes of reporting the currency breakdown in this item – (i) if the HQLA collateral mentioned above is denominated in a currency that is not the same as that of the committed facility, convert the post-haircut fair value of the collateral into the currency in which the committed facility is denominated before deduction from the undrawn portion of the facility; and (ii) if the committed facility is a multi-currency facility and the institution cannot ascertain the currency denomination of the amount of the facility that may be drawn by the customer within the LCR period, report the currency breakdown of the undrawn amount as if the facility would be drawn in Hong Kong dollars. (If the multi-currency facility does not allow drawdown in Hong Kong dollars, assume the facility will be drawn by the order of: US dollars, other major currencies, RMB and lastly other currencies (where applicable).) B20 Contractual lending obligations not otherwise covered in Section (I)B Report, in Table 9 of Section (II) of this Part, the contracted amount of the following contractual lending obligations not otherwise covered in Section (I)B of this Part:
(i) contractual lending obligations to financial institutions, the MA for the account of the Exchange Fund, or central banks; and

MA(BS)1E / P.31 (01/2020)
(ii) contractual lending obligations to –
(a) retail customers;
(b) small business customers; and
(c) sovereigns, public sector entities, multilateral development banks, wholesale customers (excluding small business customers) or any other persons not included in paragraph (i) and paragraph (ii)(a) and (b).
Table 9 will generate the required figures for this item.
B21 Other contingent funding obligations (whether contractual or non-contractual) Report the reporting institution’s other contingent funding obligations, as specified in
Table 10 of Section (II) of this Part, which will generate the required figures for this
item.
In Table 10 –
(i) Report in item 1 the total contracted amount of trade-related contingencies that are related to import or export trade transactions conducted by the reporting institution’s customers. This item does not capture undrawn commitments under trade financing facilities (which should be captured in item B19 of
Section (I) as calculated in Table 8 under Section (II) of this Part).
(ii) Report in item 2 the total contracted amount of guarantees and letters of credit provided by the reporting institution that are not stemmed from import or export trade transactions of its customers. 35

35 For example,
(1) A category 1 institution has granted a committed credit facility with a credit limit of $100 million to a customer. If the institution has issued an L/C of $20 million under that facility to facilitate an import trade conducted by the customer and the institution’s obligation under the L/C may be called upon within the LCR period, the institution should report its contingent obligation under this L/C in item 1 of
Table 10. (To avoid doubt, if there is concrete evidence supporting that a trade-related contingency will
not be called upon within the LCR period, then the institution’s contingent funding obligations arising from that trade-related contingency is not included in the calculation of this outflow item.) The remaining usable credit limit under that facility ($80 million) should be reported in Table 8. (2) If the institution has also issued a letter of guarantee with a guaranteed amount of $10 million to support the customer’s business activity which is not directly related to a specific trade transaction, the institution should report that guaranteed amount ($10 million) in item 2 of Table 10 if its contingent obligation under the guarantee may be called upon within the LCR period. The remaining usable credit limit under the facility reported in Table 8 will then be $70 million. (3) If the institution’s contingent obligation under the L/C or the guarantee has been called upon and the payment date has been confirmed to fall within the LCR period, the amount payable by the institution should be reported in Table 9 under Section (II) (so that the expected cash outflow will be reflected in item B22 of Section (I)). (4) If the institution has received from the customer any HQLA collateral to cover the facility mentioned in paragraph (1) of this footnote, the institution may deduct the collateral value (after applying the haircut

MA(BS)1E / P.32 (01/2020)
(iii) Report in item 3 the total contracted amount of the undrawn portion of uncommitted facilities granted by the reporting institution. An uncommitted facility means a credit facility or liquidity facility which is unconditionally cancellable by the institution without prior notice to the borrower. (iv) Report in item 4 non-contractual contingent funding obligations of the reporting institution, as specified in sub-items (a) to (e). (a) Sub-item 4(a) caters for situations in which the reporting institution may have the non-contractual contingent funding obligation to repurchase (or early redeem) debt securities or structured financial instruments, irrespective of whether the maturity date of which is beyond the LCR period, by virtue of the institution’s (or its associated entity’s) association with such debt securities (as the issuer, market maker or dealer) or such financial instruments (as the originator, sponsor, marketing agent or seller), especially in times of stress 36. Report in this sub-item the book value (including accrued interest) of such debt securities or financial instruments if the institution is satisfied 37 that there is a reasonable expectation that the non-contractual contingent funding obligation will be materialised within the LCR period. If the institution expects that this obligation also covers the interest to be accrued on such securities or instruments within the LCR period, the interest payable by the institution should also be reported in this item. (b) Sub-item 4(b) caters for situations in which the reporting institution may have the non-contractual contingent funding obligation to repurchase money market funds or other collective investment funds marketed by the reporting institution (or its associated entity) owing to, for example, failure to satisfy reasonable expectations from investors about the

applicable to level 2A assets and level 2B assets as the case may require) for the purposes of reporting the expected cash outflows mentioned in paragraphs (1), (2) and (3). In reporting these expected cash flows, the institution may assume that the collateral received is deployed to cover the cash outflow items in a descending order of the outflow rates applicable to those items. (5) If the institution will receive money from the customer within the LCR period to cover the amount payable as mentioned in paragraph (3), the institution may report the amount receivable as a cash inflow in item C10 of Section (I). If the institution converts the amount payable into a loan to the customer and the loan will mature within the LCR period, the loan can be reported as a cash inflow in item C4 of Section (I). 36 For example, the reporting institution which has sponsored the issue of a structured financial instrument by its associated entity may be obliged to repurchase the financial instrument when its associated entity is in financial trouble. 37 Wherever the phrase “the institution is satisfied” is referred to in this Part for the purposes of reporting any particular item (or sub-item), the MA expects the institution concerned to exercise due diligence to ascertain that there are reasonable grounds supporting the reporting of the item (or sub-item) concerned.

MA(BS)1E / P.33 (01/2020) liquidity and marketability of the funds concerned. 38 Report in this sub￾item the fair value of the funds if the institution is satisfied that there is a reasonable expectation that the non-contractual contingent funding obligations will be materialised within the LCR period. (c) Sub-item 4(c) caters for situations in which customer short positions of the reporting institution are covered by non-HQLA collateral received from the institution’s other customers in respect of which the institution has the right of re-hypothecation such that the institution may be obligated to provide funding to cover customer short positions in the event of withdrawal of the non-HQLA collateral by its other customers. Report in this sub-item the fair value of such non-HQLA collateral that is used to cover customer short positions. 39 (d) Sub-item 4(d) caters for situations in which the reporting institution may have the non-contractual contingent funding obligation to meet potential liquidity draws by a joint venture of the institution or an entity in which the institution has a minority interest, and the joint venture or entity is not consolidated for the purposes of rule 11(1), where there is a reasonable expectation that the institution will be the main liquidity provider when the joint venture or entity concerned is in need of liquidity. If the institution’s obligation to provide liquidity to the joint venture or entity has been captured in any other cash outflow item, there is no need to include the obligation in this sub-item 40. Before reporting any non￾contractual contingent funding obligation under this sub-item, the institution should notify the MA the existence of the obligation and the circumstances giving rise to the obligation and agree with the MA the methodology for determining the amount of the obligation for the purposes of the LCR on a case by case basis. (e) Sub-item 4(e) caters for any other non-contractual contingent funding obligations where the reporting institution is satisfied that there is a reasonable expectation that the obligations will be materialised within the LCR period. Report in this sub-item the amount of such obligations as expected by the institution.

38 For example, the investment funds may be marketed with the objective of maintaining a stable value or the investors may anticipate ready marketability of those funds. 39 To avoid doubt, if the collateral satisfies the requirements set out in rule 25(a) and (b), the transaction can be included in item B8 of Section (I) of this Part, where the expected cash outflow of the transaction is calculated based on a lower outflow rate. 40 For example, the institution’s contractual funding obligation arising from a committed facility granted to a joint venture or minority interest entity should be captured in item B19 instead of in this sub-item.

MA(BS)1E / P.34 (01/2020)
B22 Other contractual cash outflows
Report in this item contractual cash outflows of the reporting institution (not being contractual cash outflows relating to the operating expenses of the institution) that may occur within the LCR period and are not covered in other cash outflow items in
Section (I)B of this Part. These include, for example, expected cash outflows arising
from uncollateralized securities borrowing transactions, uncovered short positions, amounts payable for transactions awaiting settlement, dividends and interest payable by the institution within the LCR period 41 . For uncollateralized securities borrowing transactions, uncovered short positions and similar transactions which do not have a definite term to maturity, assume that the transactions will be closed out and the reporting institution’s liabilities or payment obligations arising from the transactions will be fulfilled within the LCR period. In the case of forward contracts and transactions awaiting settlement, follow the CIs provided in paragraph 25 (as read in conjunction with Annex 2). In addition, this item should include retail deposits and small business funding taken by the reporting institution or by its associated entity, where the institution or that entity is a DTC that is not subject to section 12(3) of the BO by virtue of the MA’s written permission to early repay the deposits or funding concerned (see Annex 4 for details).
C. TOTAL EXPECTED CASH INFLOWS
C1,C2 Secured lending transactions
Report in item C1 the principal amount of money (or the fair value of securities) to be received by the reporting institution within the LCR period arising from maturing secured lending transactions (including securities swap transactions), under which the institution has re-hypothecated securities obtained from the counterparty as collateral to cover the institution’s short positions in equivalent securities, irrespective of the length of time the institution may carry its short positions. Report in item C2 the principal amount of money (measured at book value, including accrued interest) to be received by the institution from maturing secured lending transactions (other than securities swap transactions) not included in item C1 within the LCR period by the type of underlying collateral. 42

41 To avoid doubt, a long-term liability or obligation may render a category 1 institution liable to pay interest within the LCR period. Such interest payable should be included in the calculation of the institution’s LCR even although the long-term liability or obligation may not be included. 42 As provided in clause 25 of the CoP, a secured lending transaction entered into by a category 1 institution is not regarded as being collateralized by an asset that falls within level 1 assets, level 2A assets, approved RMBS or other level 2B assets unless that asset satisfies the requirements set out in rule 25(a) and (b) that are applicable to it.

MA(BS)1E / P.35 (01/2020)
Report in the specific currency columns for items C1 and C2 the principal amount based on the currency denomination of the money (or the currency denomination of the securities in case of securities swap transactions included in item C1) to be received by the institution. In other words, it is not necessary for the institution to consider the currency denomination of the underlying collateral obtained from (hence to be returned to) the counterparty. 43 C3 Securities swap transactions not covered in item C1 If the reporting institution has any securities swap transactions which are not covered in item C1 and are due for settlement within the LCR period, complete Table 4 in
Section (II) of this Part, which will generate the required figures for item C3.
In Table 4, report, in the appropriate rows, the principal amounts (measured at fair value) of securities to be received by the reporting institution within the LCR period under the maturing securities swap transactions it has entered into. In order to determine the row under which a particular securities swap transaction should be reported, the institution should ascertain the type of securities to be received by it and the type of securities to be delivered to its counterparty within the LCR period. 44 If the reporting institution (or its counterparty) is contractually allowed to select securities from a list of allowable types of securities (with different levels of quality and liquidity value) for delivery in a securities swap transaction, and the institution (or its counterparty) has not confirmed what type of securities the institution (or its counterparty) will deliver under the transaction, the institution should assume that it (or its counterparty) will select from the list the type of securities to be delivered in the order specified in paragraph 22 of these CIs. Using the example provided in item B9 (in which case Bank B is the reporting institution for the purposes of item C3), Bank B’s cash-flow positions arising from the securities swap transactions are reciprocal to those of Bank A. Therefore Bank B should report the expected cash inflow arising from the securities swap transactions in
Table 4 as follows:

43 For example, if the reporting institution will receive a sum of money in Hong Kong dollars upon the maturity within the LCR period of a secured lending transaction which is collateralized by a security denominated in US dollars, the institution should report the money receivable in the “HKD” column instead of the “USD” column. 44 As provided in clause 25(5) of the CoP, a security to be received, or delivered, by a category 1 institution under a securities swap transaction is not regarded as a level 1 asset, level 2A asset, approved RMBS or other level 2B asset unless the security satisfies the requirements set out in rule 25(a) and (b) that are applicable to it.

MA(BS)1E / P.36 (01/2020)
(HKD’000 equivalent)
Type of securities to be received by reporting institution from counterparty within the LCR period Type of securities to be delivered by reporting institution to counterparty within the LCR period Principal amount of securities to be received by reporting institution Weight Weighted amount Breakdown of weighted amount by currencies HKD USD Other major $ RMB Other $ (b) level 1 assets level 2A assets 1000 15% 150 150 (i) level 2A assets assets that are not level 1 assets, level 2A assets or level 2B assets 780 85% 663 0 663 0 Total 1780 813 150 663 0 C4 Secured and unsecured loans not otherwise covered in items C1, C2 and C3 Report in this item the book value of repayments (including interest payments and instalments) from loans, whether secured or unsecured, that are contractually due within the LCR period (and not captured in other cash inflow items). Report in sub-item 4(a) contractual cash inflows from revolving loans or loans without a specific maturity date. To avoid doubt, a loan drawn on a revolving facility (whether committed or uncommitted) should be reported in this sub-item, unless the loan will be fully repaid and the facility will be cancelled upon its expiry within the LCR period because the institution has decided (as evidenced in the institution’s credit records) that the facility will not be renewed and hence any outstanding loan balance will have to be settled by the borrower upon expiry of the facility within the LCR period. In such a situation, contractual cash inflows from settlement of the loan can be reported in sub-item 4(b). Sub-item 4(b) captures contractual loan repayments not covered in sub-item 4(a) that fall due within the LCR period. Such loans should be reported with a breakdown by types of borrower. To avoid doubt, whilst a loan that is revolving or does not have a specific maturity date is usually not captured in this sub-item (save for situations where a revolving loan can meet the conditions specified above), any periodic repayment of principal, interest, fee or other income generated from such loans can be included in this sub-item. C5 Release of balances maintained by the reporting institution in segregated accounts in accordance with requirements for protection of customer assets If the reporting institution is subject to any investor protection regulations that require the institution, upon receipt of assets (whether in cash or other assets) from customers for investment purposes, to maintain an amount of those assets as prescribed in those regulations in a segregated account, the institution may report the assets maintained in that segregated account as cash inflows under this item, provided that the assets meet the conditions set out in rule 25(a) and (b), meaning that they are HQLA qualifying

MA(BS)1E / P.37 (01/2020) assets that can fulfil the characteristic requirements set out in Schedule 3 to the BLR, and the assets will be released from the segregated account within the LCR period and the corresponding assets payable to customers have been reported in the cash outflow sub-item B6(b). C6 Maturing securities not included by the reporting institution in its HQLA Report in this item the book value of securities held by the reporting institution (including accrued interest) if the securities will be redeemed within the LCR period and they are not included in the stock of HQLA of the institution. Interest to be accrued (and receivable by the institution) within the LCR period should also be reported in this item. C7 Undrawn facilities granted by other financial institutions Report in this item the undrawn portion of any credit, liquidity or other facilities granted by other financial institutions, irrespective of whether the facilities are committed facilities. C8 Operational deposits placed at other financial institutions Report in this item any amount of money placed by the reporting institution at other financial institutions if the institution is satisfied that the money placed is treated as operational deposits by those financial institutions. The methodology adopted by the institution for calculating this cash inflow item should be in line with the methodology adopted by it for determining the amount of operational deposits received by it (as referred to in item B5). C9 Contractual net cash inflows arising from derivative contracts Follow the CIs provided in Annex 5 for completing Table 5 of Section (II) of this Part, which will generate the required figures for this item. C10 Other contractual cash inflows arising from assets, transactions or activities not otherwise covered in Section (I)C Report in this item contractual cash inflows not covered in other cash inflow items by type of customer, provided that the inflows are generated from assets, transactions or activities conducted by the reporting institution and expected to be received by the institution within the LCR period. This item may capture expected cash inflows arising from, for example, forward transactions and amounts receivable from transactions awaiting settlement (see paragraph 25 and Annex 2), dividend receivable, and interest receivable (if the interest has not been included elsewhere) within the LCR period. Nonetheless, cash inflows arising from non-financial activities should be excluded.

MA(BS)1E / P.38 (01/2020)
In the case of uncollateralized securities lending transactions maturing within the LCR period, the contractual cash inflow (either in cash or other assets that qualify for inclusion as HQLA upon receipt by the institution) can be counted in this item. If the cash inflow is an asset that can qualify as a level 2A or level 2B asset upon receipt by the institution, report in this item the fair value of the asset after applicable haircut. If an uncollateralized securities lending transaction (or any similar transaction) does not have a definite term to maturity, assume the transaction will be carried forward beyond the LCR period, and therefore the cash inflow to be generated upon the settlement of the transaction cannot be included in the calculation of the LCR.

MA(BS)1E / P.39 (01/2020)
PART 3: LIQUIDITY MAINTENANCE RATIO
General requirements for reporting of LMR
31. For the purposes of the LMR, a category 2 institution should –
(i) calculate the “weighted amount” of an asset, liability, obligation or cash flow item by multiplying the principal amount (please refer to paragraph 7 of these CIs) of that item as determined in accordance with Part 8 (as read with
Schedule 5) of the BLR by the liquidity conversion factor (LCF) applicable to
that item;
(ii) ascertain that each of the assets (either owned by the reporting institution or received by the institution from its counterparty as collateral that can be re￾hypothecated) to be included in the stock of liquefiable assets meets the qualifying criteria set out in rule 49. In particular, the assets must be free from encumbrances (see rule 49(2)(c)) 45 and freely transferrable and available to the institution (see rule 49(2)(e)). If an asset held by the institution’s consolidated group member is subject to liquidity transfer restriction, rule 49(3) requires that the asset concerned must not be included in the institution’s liquefiable assets except to the extent that the qualifying liabilities (after deductions) of the member are also included in the calculation, provided that the asset concerned can satisfy all other relevant requirements specified in rule 49(1) and (2). 46

(iii) determine whether the “remaining term to maturity” of an asset, liability or obligation falls within the LMR period having regard to the approach set out in paragraph 11 of these CIs and the following illustrative examples:

45 The guidance provided in Annex 1 of SPM module LM-1 is applicable for category 2 institutions to assess whether an asset is “free from encumbrances” for LMR purposes (with all necessary modifications). 46 For example, if a category 2 institution has the following positions:
Weighted amount (after offsetting intragroup assets and liabilities) Hong Kong Office Specified associated entity (or overseas branch) Liquefiable assets $2,000 $400 Qualifying liabilities $6,000 $300 Deduction from qualifying liabilities $1,000 $100 The institution should calculate its LMR covering the specified associated entity or overseas branch (i.e. on a consolidated basis or unconsolidated basis, as the case may be) as follows:
(i) If the assets held by the specified associated entity (or overseas branch) are freely transferrable to the institution’s Hong Kong Office: LMR (con. / uncon. basis) = (2000 + 400) / {(6000 + 300) – (1000 + 100)} = 46.15%. (ii) If the assets held by the associated entity (or overseas branch) are subject to liquidity transfer restriction:
LMR (con. / uncon. basis) = (2000 + min(400, (300 – 100)) / {(6000 + 300) – (1000 + 100)} = 42.31%

MA(BS)1E / P.40 (01/2020)
Position Date
Remaining term to maturity
31.1.2015 28.2.2015 29.2.2015* 30.4.2015
Period Covered not more than 1 month 1.2.15 - 28(29*).2.15
1.3.15 - 28.3.15 1.3.15 -
29.3.15
1.5.15 -
30.5.15 more than 1 month but
not more than 1 year
1.3.15 - 31.1.16 29.3.15 - 28.2.16 30.3.15 -
28.2.16
31.5.15 -
30.4.16 not more than 1 year 1.2.15 - 31.1.16 1.3.15 - 28.2.16 1.3.15 -
28.2.16
1.5.15 -
30.4.16 more than 1 year but
not more than 5 years
1.2.16 - 31.1.20 29.2.16* or
1.3.16 - 28.2.20
1.3.16 -
28(29*).2.20
1.5.16 -
30.4.20 more than 5 years 1.2.20 onwards 29.2.20* or
1.3.20 onwards
1.3.20 onwards
1.5.20 onwards
*Assuming 29 days in February
(iv) follow the CIs provided in Annex 7 to treat the assets, liabilities, obligations or cash flows arising from spot and forward foreign exchange transactions, derivative contracts, securities transactions, forward forward deposit transactions and repo-style transactions.
Section (I): Liquidity Maintenance Ratio (month-end position)
32. In this Section, a category 2 institution should report the components of its LMR based
on its month-end position in accordance with the following:
Section (I)
Ref. no.
A. LIQUEFIABLE ASSETS
(A2) Gold bullion
Report in this item gold bullion (measured at fair value), which is confined to the reporting institution’s proprietary holdings in gold bullion (either safe-kept in its vault or by a custodian) that can be accessed readily by the institution. This item does not include any financial asset (such as unit trust fund, derivative contract, commodity￾linked instrument, or any similar type of product) which causes the institution to take a position in gold but does not necessarily enable the institution to have ready access to gold bullion. (A3) Claims on, or reserves maintained with, the MA for the account of the Exchange Fund or central banks that are repayable to the reporting institution overnight, on demand, or on notice which expires on the first day of the LMR period

MA(BS)1E / P.41 (01/2020)
Report in this item the reporting institution’s claims on, or reserves maintained with, the MA for the account of the Exchange Fund or overseas central banks only if these claims and reserves are repayable to the institution overnight (i.e. within 24 hours), on demand, or on notice which expires on the first day of the LMR period. If such claims or reserves cannot meet any of these criteria but are repayable to the institution within the LMR period, they should be reported in item (C1). RMB funds placed by the reporting institution in a RMB Fiduciary Account opened with the RMB Clearing Bank in Hong Kong (which constitutes a claim on the PBoC) can be reported in this item if the funds are repayable to the institution overnight, on demand, or on notice which expires on the first day of the LMR period. RMB funds placed by the institution with the RMB Clearing Bank, but not in the RMB Fiduciary Account or with other AIs in Hong Kong or banks operating outside Hong Kong, do not constitute a claim on the PBoC and therefore cannot be reported in this item or item (C1). Such RMB funds should be regarded as interbank placements under sub￾item (A4)(a) or item (C2), as the case may require. (A4) Net due from banks of the reporting institution to be included in its liquefiable assets If the reporting institution has any amount of net due from banks, report that amount in this item to the extent that the weighted amount of net due from banks included in this item does not exceed 40% of the institution’s total weighted amount of qualifying liabilities (before deductions). If the principal amount of one-month liabilities of the institution to other banks maturing within the LMR period exceeds the principal amount of one-month liabilities of other banks to the institution maturing within the same period (referred to in these CIs as “net due to banks”), the institution should refer to the CIs for items (B2) and (C2). Back-to-back transactions 47 must not be included in this or any other item for the calculation of the LMR (please also refer to para. 9.2.4 of SPM module LM-2). (A4)(a) Report in this sub-item total one-month liabilities of other banks to the reporting institution maturing within the LMR period. The institution’s claims under export bills discounted and its holdings in marketable debt securities or prescribed instruments should be reported in items (A5) and (A6) respectively.

47 Back-to-back transactions refer to those inter-office or intra-group transactions which typically involve two legs, one borrowing long (with maturity beyond one month) and the other lending short (with maturity within one month). Both legs of the transactions are for the same or similar amount and at the same or similar rate of interest and are, in most cases, rolled forward continuously. Such transactions typically involve no actual movement of funds, and hence should not be relied upon as a source of liquidity.

MA(BS)1E / P.42 (01/2020)
(A4)(b) Report in this sub-item total one-month liabilities of the reporting institution to other banks, including on-balance sheet liabilities and contingent liabilities (including any off-balance sheet obligations) maturing within the LMR period. Debt securities or prescribed instruments with a remaining term to maturity of not more than one month issued by the institution (together with any interest payable) should be reported in item (A8), unless alternative reporting under item (B3) is otherwise agreed by the MA (please refer to the CIs for item (A8). (A4)(c) “Net due from banks” is the difference between sub-items (A4)(a) and (A4)(b). The weighted amount derived in sub-item (A4)(c) should be included as “liquefiable assets” under the LMR only up to 40% of the reporting institution’s total weighted amount of “qualifying liabilities (before deductions)” (item (B4)) (referred to in these CIs as the 40% cap). Any excess amount over the 40% cap should be reported in item (C3) as “deduction from qualifying liabilities”. Numerical examples illustrating how a reporting institution should report its claims on (or reserves maintained with) the MA for the account of the Exchange Fund or overseas central banks (reported in item (A3)) and one-month interbank claims and liabilities (reported in item (A4) are provided in Annex 8. (A5) Export bills (A5)(a) Report in this sub-item the reporting institution’s export bills drawn under letters of credit issued by banks which are payable at sight or within the LMR period. Also report export bills which are not drawn under letters of credit but accepted by banks and due for payment within the LMR period. However, sight bills which remain unpaid for 14 days after negotiation and usance bills which remain unpaid for 14 days after due date, or whose due date has been extended, should be excluded. (A5)(b) Usance bills which are excluded from sub-item (A5)(a) may be included in this sub-item provided that they are covered by re-discounting facilities approved by the MA. A re-discounting facility will be approved only if it meets the following criteria:
(i) it is provided by a third party bank;
(ii) it is irrevocable before its expiry;
(iii) it allows usance bills to be re-discounted on a without recourse basis; and (iv) it provides for the proceeds of bills re-discounted to be remittable to the reporting institution within the LMR period.

MA(BS)1E / P.43 (01/2020)
The amount to be reported under sub-item (A5)(b) should be net of any realisation costs or discounting charges the reporting institution may expect to incur. (A6) Marketable debt securities or prescribed instruments Report the reporting institution’s marketable debt securities or prescribed instruments eligible for inclusion in this item for which the institution may receive payment within the LMR period (including any accrued interest) either upon maturity or through monetization of these securities / instruments in the secondary market. (A6)(a)(i) Market makers for EF debt securities should report their positions in these instruments in accordance with the following:
(i) the long and short positions of such instruments with a remaining term to maturity of not more than one year should be offset against one other; (ii) the long and short positions of such instruments with a remaining term to maturity of more than one year should similarly be offset against one other; (iii) if the net positions in both (i) and (ii) above are long, they should be reported in sub-items (A6)(a)(i)(A) and (A6)(a)(i)(B) respectively; (iv) if the net positions in (i) and (ii) are in opposite directions (i.e. one is long and the other is short), the long position should be reduced by the short position on a dollar-for-dollar basis. The resultant net long position, if any, should then be reported in the appropriate time band. (A6)(b)-(e) For the purposes of determining whether a marketable debt security or prescribed instrument has a qualifying ECAI rating (either issue specific rating or issuer rating, as the case may require), the reporting institution should follow the relevant requirements set out in Schedule 6 to the BCR and Schedule 5 to the BLR. The qualifying ECAI rating for marketable debt securities or prescribed instruments under these sub-items generally relates to a qualifying ECAI issue specific rating that is assigned to the debt securities / instruments concerned. However, marketable debt securities or prescribed instruments which do not have a qualifying ECAI issue specific rating but are issued or guaranteed by specific types of entities set out in sub-items A6(b) and A6(d)) that have a qualifying ECAI issuer rating may also be included as liquefiable assets.

MA(BS)1E / P.44 (01/2020)
(A6)(b) This sub-item captures marketable debt securities or prescribed instruments issued or guaranteed by the central bank or central government of a country, a multilateral development bank, or a relevant international organization, where the debt security or instrument, or its issuer or guarantor, has a qualifying ECAI rating. (A6)(c)(i) This sub-item captures marketable debt securities or prescribed instruments issued or guaranteed by a bank, other than those included in sub-item (A6)(a)(ii), provided that the debt securities or instruments concerned have a qualifying ECAI issue specific rating. (A6)(c)(ii) This sub-item captures marketable debt securities or prescribed instruments issued or guaranteed by a regional government of a country or by any other entity, provided that the debt securities or instruments concerned have a qualifying ECAI issue specific rating. “Other entity” for this purpose can be a financial institution (which is not a bank), a corporate or any other entity not specified elsewhere in item (A6). (A6)(d)(i) This sub-item captures marketable debt securities or prescribed instruments without a qualifying issue specific rating, but which are issued or guaranteed by a bank (other than those debt securities or instruments captured in sub-item (A6)(a)(ii)), provided that the debt securities or instruments concerned have a remaining term to maturity of not more than one month or the issuer has a qualifying ECAI issuer rating. (A6)(d)(ii) This sub-item captures marketable debt securities or prescribed instruments without a qualifying ECAI issue specific rating, but which are issued or guaranteed by a regional government of a country that has a qualifying ECAI issuer rating. (A6)(e) This sub-item captures any other marketable debt securities or prescribed instruments not included elsewhere in sub-items A6(a) to A6(d), but which the reporting institution should be able to use in order to secure borrowing from the MA for the account of the Exchange Fund or the central bank of a country (which has a qualifying ECAI issuer rating) through a standing facility, the nature of which is similar to the Discount Window operated by the MA for the account of the Exchange Fund. To avoid doubt, such a standing facility does not include any emergency liquidity facility that may be provided by a central bank in stressed situations.

MA(BS)1E / P.45 (01/2020)
(A6)(f) This sub-item captures (i) RMBS 48 and (ii) any other marketable debt securities or prescribed instruments that have been approved specifically by the MA for inclusion as liquefiable assets under the LMR. (A6)(g) This sub-item captures all marketable debt securities or prescribed instruments not reported in item (A6)(a) to (A6)(f) and with a remaining term to maturity of not more than one month. (A6)(h) This sub-item captures all marketable debt securities or prescribed instruments having an investment-grade ECAI rating not reported elsewhere in item (A6). (A7) Listed ordinary shares Report in this item all listed ordinary shares that comply with the requirements set out in rule 49(2)(fa) and Schedule 2 (section 3(c) of Part 2 and section 10 of Part 3) to the BLR. 49 (A8) Residential mortgage loans in respect of which there has been issued by The Hong Kong Mortgage Corporation Limited (HKMC) an irrevocable commitment to purchase which is approved by the MA The MA's prior approval is required for reporting any mortgage loan in this item. Report in this item the reporting institution's residential mortgage loans covered by The HKMC’s irrevocable Forward Commitment Facility (Facility) that are immediately saleable to The HKMC. Such loans should conform to The HKMC’s purchasing requirements and satisfy any conditions as set out in its Forward Commitment Facility Letter Agreement (Facility Agreement) approved by the MA for this purpose. The total reported amount cannot exceed the amount of commitment agreed under the Facility (less any commitment amount utilised). If The HKMC, under the Facility Agreement, requires the institution to repurchase defaulted mortgage loans, the obligation to repurchase such mortgage loans should be included in the institution's qualifying liabilities for the calculation of its LMR if the repurchase is to be made within the LMR period.

48 The criteria that the MA will take into account in assessing an application submitted by a category 2 institution for inclusion of RMBS as liquefiable assets under the LMR are essentially the same as those set out for the LCR purposes (as provided in section 8 of Schedule 2 to the BLR). Please refer to the guidance provided in Annex 2 of SPM module LM-1. 49 Please refer to footnote 20, which is also applicable for LMR purposes.

MA(BS)1E / P.46 (01/2020)
(A9) Deduction from liquefiable assets – Debt securities or prescribed instruments with a remaining term to maturity of not more than 1 month issued by the reporting institution Report these securities or instruments in this item, measured at book value (including accrued interest and any interest payable by the reporting institution upon redemption of these securities or instruments within the LMR period). Alternatively, these liabilities may be reported in item (B3) if the reporting institution can demonstrate to the satisfaction of the MA that the liabilities will be rolled over or refinanced upon maturity. The MA will require reasonable assurance from the institution that, by reference to past experience where appropriate, the maturing liabilities will in all likelihood be refinanced and are not simply “one-off” transactions. This might apply, for example, where the institution is able to tap a reliable pool of investors through regular issues of certificates of deposit. B. QUALIFYING LIABILITIES (B1) Total one-month liabilities of the reporting institution to the MA for the account of the Exchange Fund or central banks Report in this item the reporting institution’s liabilities to the MA for the account of the Exchange Fund or central banks (if any), including liabilities repayable on demand or having a remaining term to maturity of not more than one month. (B2) If the reporting institution’s total one-month liabilities to other banks exceed the total one-month liabilities of other banks to the institution, the amount of the institution’s total one-month liabilities to other banks This item should be reported by the reporting institution only if its “net due to banks” is greater than zero, and should cover the institution's total one-month liabilities to banks. Total one-month liabilities of banks to the institution should be reported under item (C2). (B3) Other one-month liabilities Report in this item the reporting institution's deposits and other liabilities payable (including interest payable) within the LMR period which are not included elsewhere. This item includes, for example – (i) the institution's irrevocable commitments 50 to provide funds to its customers on a known date of draw-down within the LMR period or irrevocable standby

50 Please refer to the guidance provided in paragraphs 5.8.22, 6.3.3 and 6.3.4 of SPM module LM-1 for determining the liquidity requirements for “irrevocable commitments”.

MA(BS)1E / P.47 (01/2020) facilities which can be drawn upon by the institution’s customers on demand, at call or on notice that will expire within the LMR period. (ii) contingent liabilities (other than trade-related contingencies) 51; (iii) contractual payments within the LMR period arising from derivative contracts (see Annex 7); and (iv) fee or interest payable within the LMR period, if not already included elsewhere. 52 In the case of the sale or purchase of securities conducted by the reporting institution on behalf of the institution's clients (including brokers), the amount payable to these clients arising from such transactions can be excluded from this item, even if the transactions are due for settlement within the LMR period. 53 Similarly, the corresponding receivables from the institution's clients (including brokers) should not be included as “deduction from qualifying liabilities” (please refer to subsection C of this Return). Such reporting treatment is also applicable to account receivables and payables arising from margin trading transactions which are valued but not yet settled.

For LMR purposes, undrawn facility limits granted by an AI under overdraft and credit card facilities can be disregarded when the AI determines the amount of its qualifying liabilities. This exception will not be applicable if an AI grants a multi-purpose facility that allows a customer to draw on various types of loans in addition to overdraft or credit card advances, and there exists any lending commitment which is irrevocable. 51 For example, in the case of an undertaking by a reporting institution under a letter of guarantee (or any contract having a nature similar to a letter of guarantee, such as a standby letter of credit):
(i) if a guarantee issued by the institution has been called upon resulting in the institution having an irrevocable commitment to pay on this guarantee within the LMR period, the amount payable by the institution under such an irrevocable commitment should be reported in this item; (ii) if a guarantee issued by the institution contains provisions to the effect that the institution will have an obligation to (A) pay within the LMR period in case the guarantee is called upon (where the notice period for the guarantee is within the LMR period); or (B) pay on demand (where no notice period is required), the contingent liability under the guarantee should also be reported in this item regardless of whether it has been called upon, except in cases where any condition attached to the execution of the guarantee cannot in practice be met within the LMR period. Nonetheless, trade-related contingencies (such as shipping guarantee) are not subject to this treatment (unless, as discussed in (i), the contingent liabilities have been called upon and the liabilities are contractually payable within the LMR period). “Trade-related contingency” has the meaning given by section 2(1) of the BCR. It refers to a contingent liability which relates to trade-related obligations, including liabilities arising from issuing and confirming letters of credit, acceptances on trade bills, and shipping guarantees. For clarity’s sake, a credit limit under a trade financing facility granted by a reporting institution is not “trade-related contingency”. 52 For example, if the reporting institution has a liability maturing beyond the LMR period but that liability will create any fee or interest payable by the institution within the LMR period, the fee or interest payable should be included as “qualifying liabilities”. If the reporting institution is able to identify that the fee or interest will be payable to a particular type of counterparty, it should report the amount of fee or interest payable to that type of counterparty in the appropriate items (e.g. item (A4)(b) or item (B2) as the case requires, if the fee or interest is payable to a bank). If the institution cannot identify readily the type of counterparty, it should report the interest payable in item (B3). 53 Such transactions can be excluded given that they are not proprietary transactions and the liquidity risk involved is considered to be relatively low.

MA(BS)1E / P.48 (01/2020)
Such transactions refer to those margin trading positions with respect to which the institution's clients have not given any instruction to close out. Margin deposits arising from such transactions should however be included as qualifying liabilities of the institution where appropriate. If a deposit is contractually pledged to the reporting institution as collateral to secure a loan granted by the institution to a non-bank customer, the pledged deposit can be excluded from the calculation of the LMR, subject to the following conditions:
(i) the loan will not be settled within the LMR period; (ii) the pledge arrangement is subject to a legally enforceable contract that effectively disallows withdrawal of the deposit before the loan is fully settled; (iii) the deposit would otherwise be included in the calculation of qualifying liabilities; and (iv) the amount of deposit to be excluded must not exceed the outstanding balance of the loan (or the drawn portion of a facility). The above reporting treatment does not apply to a deposit which is pledged against an undrawn facility (or the undrawn portion of a partially drawn facility). Please refer to the CIs for item (C4) re the reporting of eligible loan repayments secured by deposits placed with the institution. Deposits which are pledged with the institution to secure other off-balance sheet obligations should be reported as qualifying liabilities. Nevertheless, such deposits may be excluded from the institution's qualifying liabilities to the extent that they are pledged to secure off-balance sheet obligations that are also required to be reported as qualifying liabilities. 54
C. DEDUCTIONS FROM QUALIFYING LIABILITIES
(C1) Total one-month liabilities of the MA for the account of the Exchange Fund, or central banks to the reporting institution (other than the amount included in item (A3)) Report in this item total one-month liabilities of the MA for the account of the Exchange Fund or central banks to the reporting institution (other than the amount of

54 For example, a deposit pledged with the reporting institution to secure a guarantee issued by the institution should be reported as a qualifying liability if the deposit can be withdrawn from the institution within the LMR period. If however the guarantee issued by the institution is called upon, resulting in the institution having to honour its obligation under the guarantee within the LMR period (hence creating a qualifying liability under the guarantee), then the pledged deposit does not need to be counted as a qualifying liability. This is based on the reasonable expectation that the institution will use the pledged deposit to cover its liability or obligation under the guarantee (hence no additional liquidity is required for repaying the pledged deposit).

MA(BS)1E / P.49 (01/2020) such liabilities that is repayable on demand or withdrawable within 24 hours should be reported as liquefiable assets in item (A3)). (C2) If the reporting institution's total one-month liabilities to other banks exceed the total one-month liabilities of other banks to the institution, the amount of the total one-month liabilities of other banks to it This item should be reported by the reporting institution only if the principal amount of its “net due to banks” is greater than zero, and should capture total one-month liabilities of banks to the institution. The institution's total one-month liabilities to banks should be reported in item (B2). (C3) Weighted amount, if any, of the reporting institution's net due from banks exceeding the 40% cap referred to in BLR rule 48(7) This item should be reported by the reporting institution only if the weighted amount of its “net due from banks” exceeds the 40% cap specified in sub-item (A4)(c). The institution should report the excess amount in this item as a deduction from its qualifying liabilities. (C4) Eligible loan repayments Report in this item any loan repayment (including principal and interest receivable) from the reporting institution's non-bank customers which (i) fall due within the LMR period and (ii) satisfy the eligibility criteria set out in the definition of “eligible loan repayment” provided in Schedule 5 to the BLR. This item should exclude any repayment in respect of mortgage loans reported in item (A7). For the purposes of this item, a loan is regarded as fully performing if there are no arrears of principal or interest in respect of the loan. Where the payment date(s) of principal or interest of a loan has been “rescheduled”, including the roll-over of a loan on its original due date or the re-negotiation of a loan’s payment terms in advance of maturity, the loan can still be regarded as fully performing provided that – (i) the rescheduling of payment dates is not caused by a deterioration in the financial position of the borrower or of his ability to meet the original repayment schedule; and (iii) the revised payment terms are not “non-commercial” to the institution. Loans repayable by instalments at an interval of not more than one month (e.g. residential mortgage loans, hire purchase loans and personal loans) will still be regarded as fully performing if there is no instalment which is overdue for more than one month on the reporting date.

MA(BS)1E / P.50 (01/2020)
Loans falling due within the LMR period that have revolving features, i.e. where the institution has a commitment to provide finance to the borrower under a facility on an ongoing basis, should not be included in this item. However, such revolving loans can be included as eligible loan repayments when both the outstanding loan and the facility are due to mature or expire within the LMR period and the institution has made no commitment, either verbally or in writing, to renew the facility upon its expiry. The reporting of repayments of loans which are secured by deposits pledged with the institution should be based on a cash-flow concept. The following table illustrates how the loan repayments and the pledged deposits, both of which are due within the LMR period, should be reported:
Amount to be included in
Scenario Eligible Loan Repayments One-month liabilities (A) (B) (A) (B) L = D - R* - - L > D R - D R* - - L < D - R* D - L D – L (A) = in the case of a loan, including a loan to be repaid by instalments, the outstanding balance of which will be fully repaid within the LMR period (B) = in the case of a loan the outstanding balance of which will not be fully repaid within the LMR period L = outstanding balance of the loan D = amount of the pledged deposit R = repayment(s) of the loan due within the LMR period

• = to the extent that the repayments will not be used to reduce the
  amount of the deposit or interest payable on the deposit.
  Where the pledged deposit matures beyond the LMR period, a repayment of the loan due within that period can be included as eligible loan repayment.
  Section (II): Average Liquidity Maintenance Ratio during the reporting period

33. A category 2 institution should report its average LMR during the reporting period in
    this Section. The average LMR is expressed as the ratio of “average liquefiable assets” (item A) to “average qualifying liabilities (after deductions)” (item B). The two items should be calculated by dividing the sum of the weighted amounts of liquefiable assets, or the sum of the weighted amounts of qualifying liabilities (after deductions), as the case may be, maintained by the reporting institution at the close of business on each working day during the reporting period, by the number of working days during that period. If the institution has been approved by the MA to calculate its average LMR

MA(BS)1E / P.51 (01/2020) on the basis of specified days within a calendar month, it should calculate the average liquefiable assets and average qualifying liabilities (after deductions) by dividing the sum of the weighted amounts of liquefiable assets, or the sum of the weighted amounts of qualifying liabilities (after deductions), as the case may be, maintained by the institution at the close of business on each of the specified days within the reporting period by the number of such specified days within that period. If any such specified day is a public holiday, the immediately preceding working day should be taken for the purposes of such calculation.

MA(BS)1E / P.52 (01/2020)
Annex 1
Framework for adoption of ALA Option 2 in Hong Kong 55 Background

1. Pursuant to rule 37, a category 1 institution that is running a HKD LCR mismatch may
   use a portion of its foreign currency-denominated HQLA (which must be level 1 assets) to cover its HKD LCR mismatch, provided that the conditions set out in that rule are met fully.
2. It is not the MA’s intention to require case-by-case approval of the use the provisions of
   rule 37 by individual category 1 institutions. However, a rule 37 institution should be able to demonstrate its compliance with rules 37 and 38 upon request by the MA. Relevant parameters for operation of rules 37 and 38
3. The use of foreign currency-denominated HQLA to cover HKD LCR mismatch is
   subject to foreign exchange haircuts if the level of usage exceeds a certain threshold (as specified in rule 38(2) 56). Such haircuts are – Foreign exchange haircuts (a) Level 1 assets denominated in US dollars 2% (b) Level 1 assets denominated in other major currencies with global transaction volume exceeding 10% of total global foreign currency market turnover (i.e. EUR, JPY and GBP) 8% (c) Level 1 assets denominated in any other foreign currency that is freely convertible into Hong Kong dollars (including RMB assets that meet relevant qualifying criteria as HQLA) 10%
4. The threshold for triggering the application of foreign exchange haircuts is 25% of a
   rule 37 institution’s HKD-denominated total net cash outflows and pursuant to rule 37(d), the institution may use foreign currency-denominated HQLA to cover HKD LCR mismatch provided that HKD-denominated level 1 assets are not less than 20% of HKD-denominated total net cash outflows (in line with the Basel LCR standard). This means that the relevant portion of foreign currency-denominated HQLA subject to foreign exchange haircuts will not exceed an amount equivalent to 55% (= 100% – 20% – 25%) of HKD-denominated total net cash outflows.

55 ALA Option 2 refers to the second option set out in paragraphs 59 to 61 of the 2013 BCBS LCR Document that banks in jurisdictions with insufficient HQLA may be allowed to adopt (subject to meeting various criteria set out in the Document). Rules 37 and 38 provide for the use of this option in Hong Kong. 56 As provided in rule 38(2), foreign exchange haircuts do not apply to the relevant portion (or that part of the relevant portion) of foreign currency-denominated HQLA, held by a category 1 institution to cover its HKD LCR mismatch, that is not more than 25% of the institution’s HKD-denominated total net cash outflows.

MA(BS)1E / P.53 (01/2020)
5. The example below demonstrates the methodology underlying Table 2 of Section (II) of
this Return for calculating the amount of haircuts on foreign currency-denominated level 1 assets if the reporting institution uses such assets to cover its HKD LCR mismatch. (Unit: HKD’000 equivalent) Total HKD USD Other major $ RMB Other $ 1 Total level 1 assets (before deductions) (= Section (I), item A1(f)) 3200 1200 200 100 500 1200 2 Total level 2A assets (before deductions) (= Section (I), item A2(d)) 2400 300 500 800 200 600 3 Total level 2B assets (before deductions) (= Section (I), item A3(d)) 100 100 4 Total HQLA (before deductions) (= Section (I), item A4) 5700 1500 700 1000 700 1800 5 Total expected cash outflows (= Section (I), item B23) 10500 5000 2000 1500 1000 1000 6 Total expected cash inflows (before application of 75% inflow ceiling) (= Section (I), item C11) 5200 1000 1200 1000 1200 800 7 HKD LCR mismatch (= Max(item 13*(item 5 – item 6) – item 4, 0)) 900 8 The part of item 7 that exceeds 25% of the reporting institution’s HKD-denominated total net cash outflows (=Max (If (item 7 = 0, 0, item 7 – Max(item 5 – item 6,0)* Max(0, 25% – (100% – item 13))) ,0) 900 9 HKD-denominated HQLA (level 1 assets) as a percentage of HKD-denominated total net cash outflows (before adjustment for 75% inflow ceiling) (Note: Rule 37(d) is satisfied if item 9 =/> 20%) Yes / No/ N/A 10 Foreign currency-denominated HQLA (level 1 assets) exceeding foreign currency-denominated total net cash outflows (if any) (=Min ( Max ( item 4 – item 13* Max ( item 5 – item 6,0),0), item 1)) 200 100 500 1200 11 Relevant portion of item 10 being used to cover HKD LCR mismatch 200 100 500 100 12 Foreign exchange haircuts 2% 8% 10% 10% 72 4 8 50 10 13 Minimum required level of LCR applicable to the reporting institution Note Note: The minimum required level of LCR is 100%, unless the HKMA has required the reporting institution to observe another specified level.

MA(BS)1E / P.54 (01/2020)
Explanatory Notes
 In this example, a category 1 institution has a HKD LCR mismatch of HKD900 (item 7). If the institution uses foreign currency-denominated HQLA (which must be level 1 assets) to cover this amount of HKD LCR mismatch, a portion of these foreign currency-denominated HQLA (also equivalent to HKD900 in this specific example, as indicated in item 8) will be subject to foreign exchange haircuts.  Item 9 reflects whether the institution meets the 20% minimum holding requirement for HKD-denominated HQLA (which must be level 1 assets). If the institution is unable to observe this requirement, it must notify the MA immediately, so that the MA may consider appropriate supervisory measures to address this situation. (See SPM module LM-1 (paragraphs 5.7.6 to 5.7.9)).  Item 10 calculates the surplus amount of foreign currency-denominated HQLA (level 1 assets) that can be used to cover HKD LCR mismatch. In this example, the reporting institution has surplus level 1 assets in USD (equivalent to HKD200), other major currencies (equivalent to HKD100), RMB (equivalent to HKD500) and other currencies (equivalent to HKD1200).  Item 11 determines the amount of foreign currency-denominated HQLA (level 1 assets) that are actually required to cover HKD LCR mismatch. In determining the order of usage of foreign currency-denominated HQLA to cover HKD LCR mismatch, it is assumed that foreign currency assets that are subject to lower foreign exchange haircuts will be utilised first. The order of usage is therefore assumed to follow this order: (i) USD, (ii) other major currencies (EUR, JPY, GBP); (iii) RMB; and (iv) other currencies. In this example, the surplus level 1 assets denominated in USD (HKD200) will be utilised first, followed by the surplus level 1 assets denominated in other major currencies (HKD100), then level 1 assets denominated in RMB (HKD500) and finally level 1 assets denominated in other currencies (up to an amount equivalent to HKD100).  Item 12 calculates the total amount of foreign exchange haircut resulting from the use of the relevant portion of foreign currency-denominated HQLA (level 1 assets) to cover HKD LCR mismatch. This total amount of foreign exchange haircut is transposed to item A6 of Section (I) of Part 2 of this Return for calculating the total amount of HQLA (after deductions).

MA(BS)1E / P.55 (01/2020)
Annex 2
Treatment of cash flows arising from forward contracts and transactions awaiting settlement under the LCR

1. The term “forward contract” means a contract between two parties for entering into a
   transaction (e.g. to provide a loan of money, or to purchase, sell or exchange a specified quantity of commodity, currency, financial instrument or thing) at a specified price on a specified future date (Day F). Some forward contracts may have a definite termination date (Day T). On Day F (and Day T where applicable), the counterparties to the contract will incur cash (or asset) inflows or outflows, which should be treated under the LCR according to the requirements set out below.
2. If the reporting institution has entered into a forward contract with a counterparty where
   Day F falls within the LCR period and Day T falls after the LCR period (or Day T is not specified in the contract), the institution should report – (i) in item B22 of Section (I) of Part 2 of this Return, the contractual cash outflow to be paid by the institution on Day F 57. If the institution will receive an asset that will qualify as HQLA on Day F (meaning that the asset will meet all the requirements under rule 25 upon receipt) under the forward contract (e.g. in the case of a forward asset purchase contract in which the institution is the asset buyer or a forward reverse repo contract in which the institution will receive collateral from the counterparty), the fair value of that asset (after application of haircuts in the case of a level 2A or level 2B asset) may be deducted from the contractual cash outflow arising from the contract; or (ii) in item C10 of Section (I) of Part 2 of this Return, the contractual cash inflow to be received by the institution on Day F. If the institution will deliver an asset on Day F under the forward contract, and the institution has counted that asset as HQLA (or has already re-hypothecated that asset to obtain funding), the fair value of that asset (after application of haircuts in the case of a level 2A or level 2B asset) should be deducted from the contractual cash inflow arising from the contract.
3. If Day F and Day T of a forward contract both fall within the LCR period, this contract
   is not considered under the LCR. 58

57 In case of a forward securities swap transaction, report in item B22, the fair value of the asset to be delivered by the institution on Day F, net of the fair value of any asset that will qualify for inclusion as HQLA once received by the institution on Day F. The fair value of the asset to be delivered or received by the institution on Day F should be determined after application of haircuts if the asset concerned is not level 1 asset. 58 This treatment is provided in BCBS FAQ (June 2017) (no. 24) based on a simplified assumption that the cash flow to be generated on Day F (when the transaction is executed) and the opposite cash flow to be generated on Day T (when the transaction is terminated) will be offset exactly within the LCR period. The reporting institution should however notice that this assumption may not always be valid in the light of the possibility that (1) there may be a difference between cash inflows and outflows generated at different points of time, or

MA(BS)1E / P.56 (01/2020)
4. If Day F of the contract had occurred before the start of the LCR period whereas Day T
of the contract falls within the LCR period, the contract can be treated as a spot contract awaiting settlement. The cash flows to be accounted for on Day T should be reported according to applicable requirements. 59

(2) there exists a time gap between Day F and Day T even though these two points in time both fall within the LCR period. The institution should manage the relevant liquidity risks that are not captured under the LCR. 59 For example, if a forward repo contract was executed on Day F which is prior to the LCR period and Day T falls within the LCR period, the contract should be captured in item B8 (instead of item B22) of Section (I) of
Part 2 of this Return.

MA(BS)1E / P.57 (01/2020)
Annex 3
Completion instructions for Table 1 of Section (II) – Determination of adjustments to HQLA for 15% ceiling on level 2B assets and 40% ceiling on sum of level 2A and level 2B assets

1. If the reporting institution has entered into any securities financing transaction which
   will necessitate the exchange of an asset for another asset, both of which are eligible for inclusion as HQLA, within the LCR period, complete sub-items 2(d) to 2(f) of Table 1 by reversing the effect of the securities financing transaction from the institution’s HQLA positions, as if the exchange of assets were executed on the day when the LCR is calculated. Table 1 will generate the figure required for reporting under item A5 in
   Section (I) of Part 2 of this Return. If the institution does not have any such transaction
   outstanding, it should report sub-items 2(d) to 2(f) of Table 1 in the same amounts as those derived in sub-items 1(f), 2(d) and 3(d) in Section (I)A of Part 2 of this Return.
2. An illustrative example for the completion of sub-items 2(d) to 2(f) of Table 1, as well
   as the calculation of adjustments to HQLA for the 15% and 40% ceilings is provided below. To avoid doubt, the amounts shown in all illustrative tables in this Annex are weighted amounts after applying the haircuts applicable to the assets.
   2.1 Bank X has maintained the following positions in HQLA holdings:
   (Unit: HKD’000 equivalent)
   Table (A) Weighted
   amount
   HKD USD Other major $
   Other currencies
   (incl. RMB)
   Level 1 assets 2100 1000 600 500 0
   Level 2A assets 1600 900 700
   Level 2B assets 1900 800 800 300 0
   Sum of level 1 assets, level 2A assets and level 2B assets (before deductions) 5600 2700 2100 800 0
   2.2 Some of the above assets are obtained through the two securities financing transactions
   specified below, which will be due for settlement within the LCR period. (Unit: HKD’000 equivalent)
   Table (B) Receivable upon settlement Payable upon settlement
   (1) Securities reverse repurchase transaction level 1 asset in USD (post-haircut fair value equivalent to HKD100) level 1 asset in HKD (post-haircut fair value equivalent to HKD110) (2) Securities swap transaction level 2A asset in JPY (post￾haircut fair value equivalent to HKD200) level 2B assets in USD (post￾haircut fair value equivalent to HKD220)

MA(BS)1E / P.58 (01/2020)
2.3 If the two securities financing transactions are reversed, Table (A) will be adjusted as
follows (whilst the figures in yellow cells should be reported in items 2(d) to 2(f) of
Table 1):
(Unit: HKD’000 equivalent)
Table (C) Total HKD USD Other
major $
Other currencies
(incl. RMB)
Adjusted level 1 assets 2090 890 700 500 0
Adjusted level 2A assets 1800 900 700 200 0
Adjusted level 2B assets 1680 800 580 300 0
Total 5570 2590 1980 1000 0
3. Using the above example, Table 1 will calculate the adjustment figures for the 15%
ceiling and 40% ceiling by adopting the following steps:
3.1 Step 1: Before reversing any securities financing transaction, the adjustments are
calculated as follows based on the data in Table (A) – Adjustment for 15% ceiling = Max (level 2B assets – 15/85*(level 1 assets + level 2A assets), level 2B assets – 15/60* level 1 assets,
0) = Max (1900 – 15/85*(2100 + 1600), 1900 – 15/602100, 0) = 1375
Adjustment for 40% ceiling
= Max ((level 2A assets + level 2B assets - adjustment for 15% ceiling) - 2/3 level 1 assets, 0) =Max ((1600 + 1900 – 1375) – 2/32100, 0) = 725 Total adjustments for 15% ceiling and 40% ceiling = 1375+725 = 2100
3.2 Step 2: After reversing securities financing transactions, the adjustments are calculated
as follows based on the data in Table (C) –
Adjustment for 15% ceiling
= Max (adjusted level 2B assets – 15/85(adjusted level 1 assets + adjusted level 2A assets), adjusted level 2B assets – 15/60* adjusted level 1 assets, 0) = Max (1680 – 15/85*(2090 + 1800), 1680 – 15/602090, 0) = 1158 Adjustment for 40% ceiling = Max ((adjusted level 2A assets + adjusted level 2B assets - adjustment for 15% ceiling) - 2/3 adjusted level 1 assets, 0); = Max ((1800 + 1680 – 1158) – 2/3*2090, 0) = 929 Total adjustments for 15% ceiling and 40% ceiling = 1158+929 = 2087
3.3 Step 3: The more conservative outcome shown in Step 1 or Step 2 is transposed to item
A5 of Section (I) of Part 2 of this Return. (In this example, the final result is HKD2100.)

MA(BS)1E / P.59 (01/2020)
Annex 4
Treatment of deposits taken by deposit-taking companies under the LCR

1. The CIs set out in this Annex apply to category 1 institutions (or their specified
   associated entities in the case of category 1 institutions incorporated in Hong Kong) which are deposit-taking companies (DTCs). Legal restriction on deposits taken by DTCs
2. Pursuant to section 12(3) of the BO, “A deposit-taking company shall not, without the
   written permission of the Monetary Authority, repay any deposit within a period of less than three months (as specified in the First Schedule to the BO) from the date on which the deposit was taken by the company.” Nonetheless, this legal prohibition from early repayment of a deposit taken by a DTC does not apply in the following situations:
   (i) if the deposit has already been held by the DTC for three months or more from the date on which the deposit was taken by the DTC; and (ii) if the deposit has not been held by the DTC for three months or more from the date on which the deposit was taken by the DTC, but the MA has granted a written permission under section 12(3) for early repayment of the deposit. Treatment of deposits subject to section 12(3) restriction
3. Deposits taken by a DTC with a remaining term to maturity that is beyond the LCR
   period (even though such deposits have been held by the DTC for less than three months) can be excluded from the calculation of the LCR, provided that no section 12(3) permission has been granted by the MA in respect of those deposits. 60 Treatment of deposits not subject to section 12(3) restriction (due to holding of deposits for three months or more)
4. If deposits taken by a DTC have been held by the DTC for three months or more, the
   section 12(3) restriction does not apply to those deposits. The outflow treatment of
   those deposits should follow the CIs set out in item B1, B3, B5 or B6 of Section (I) of
   Part 2 of this Return as appropriate. That is,

60 This is a special treatment for “retail term deposits” taken by DTCs (otherwise those deposits will be subject to a 5% outflow rate). In the case of “unsecured wholesale funding” obtained by a DTC subject to the LCR, if the earliest possible contractual maturity date of the funding does not fall within the LCR period, the funding concerned is already not required to be included for LCR purposes.

MA(BS)1E / P.60 (01/2020)
(i) retail deposits (other than retail term deposits) taken by a DTC that will mature within the LCR period should be treated as “less stable retail deposits” and hence reported under sub-item B1(b), given that deposits taken by DTCs are not protected by the Deposit Protection Scheme in Hong Kong and therefore do not qualify as “stable retail deposits”. Similarly, small business funding obtained by a DTC maturing within the LCR period should be reported in sub-item B3(b); (ii) retail term deposits taken by a DTC that will mature beyond the LCR period should be reported in sub-item B1(c). Similarly, small business funding obtained by a DTC that will mature beyond the LCR period should be reported in sub-item B3(c); (iii) other deposits taken by a DTC (e.g. from wholesale customers which are not small business customers) maturing within the LCR period should be reported in item B5 or B6 as the case may require. Treatment of deposits not subject to section 12(3) (by virtue of MA’s written permission under section 12(3))
5. If the withdrawal restriction under section 12(3) does not apply to a deposit taken by a
DTC because of the MA’s written permission to allow early repayment of the deposit, the deposit should be subject to an outflow rate of 100% (given the likelihood that the deposit would be repaid soon after the MA’s permission is granted). Report the deposit in the following item or sub-item under Section (I)(B) of Part 2 of this Return:
(i) item B22 (i.e. other contractual cash outflows) if the deposit is a retail deposit or small business funding (ii) sub-item B6(b) (i.e. unsecured wholesale funding other than funding covered under item B3, B4, B5 or B6(a))

MA(BS)1E / P.61 (01/2020)
6. The above CIs are summarised as follows:
Term deposits taken from retail or small business customers Term deposits taken from wholesale customers (other than small business customers) Remaining term within LCR period Remaining term exceeding LCR period Remaining term within LCR period Remaining term exceeding LCR period Restricted by s.12(3) Counted as “less stable retail deposits” (sub-item B1(b)) or “less stable small business funding” (sub-item B3(b)), subject to 10% outflow rate Not counted Counted in item B5 or B6 according to usual requirements Not counted Not restricted by s.12(3) because the 3- month restriction has been fulfilled Counted as “retail term deposits” (sub-item B1(c) or “small business term funding” (sub-item B3(c)), subject to 5% outflow rate Exempted from s.12(3) by MA Counted as “other contractual cash outflows” (item B22), subject to 100% outflow rate Counted in sub-item B6(b), subject to 100% outflow rate

MA(BS)1E / P.62 (01/2020)
Annex 5
Completion instructions for Table 5 of Section (II) of Part 2 – Calculation of contractual net cash outflows and inflows arising from derivative contracts under LCR
1. Follow the steps below to complete Table 5, which will generate the required figures for
reporting of cash outflow item B10 and cash inflow item C9 in Section (I) of Part 2 of this Return. 61 Item 1. Gross amount of cash-flows (after collateral adjustments, if any)
2. Report in item 1 the gross amount, measured at fair value in accordance with the
reporting institution’s usual valuation methodology, of (a) contractual cash outflows to be paid, and (b) contractual cash inflows to be received, by the institution within the LCR period under derivative contracts entered into by the institution. For example, the reporting institution (Bank A) has entered into the following derivative contracts with its counterparty (Bank B):
(Unit: HKD’000 equivalent)
Bank A Bank B Applicable exchange rates
Contract (I) Inflow (IF):
Outflow (OF):
USD130
EUR100
EUR100
USD130
@ 7.8 HKD per USD
@ 9.75 HKD per EUR
@ 12 HKD per GBP
@ 7 HKD per AUD
@ 13.33 JPY per HKD
Contract (II) IF:
OF:
JPY 15000
GBP 100
GBP 100
JPY 15000
Contract (III) IF:
OF:
HKD 630
AUD 100
AUD 100
HKD 630
Bank A should complete item 1 of Table 5 as follows:
(Unit: HKD’000 equivalent)
1. Gross amount of cash
flows (before collateral adjustments, if any) Principal amount Weight Weighted amount Breakdown of weighted amount by currencies HKD USD Other major $ RMB Other $ (a) Contractual cash outflows 2875 2875 0 0 2175 (EUR1009.75) + (GBP100 12) 0 700 (AUD100*7) (b) Contractual cash inflows 2769 2769 630 1014 (USD130 * 7.8) 1125 (JPY15000 ÷13.33) 0 0

61
While items B10 and C9 in Section (I) of Part 2 are capturing contractual net cash flows arising from derivative contracts, contractual net cash flows arising from spot currency transactions (if any) should also be included in these two items as the case may be. Usually, the contractual cash outflow and the contractual cash inflow arising from a spot currency transaction may be offset if the inflow and outflow is settled on the same day (which is usually the case for a spot currency transaction).

MA(BS)1E / P.63 (01/2020)
Adjustments for HQLA collateral posted or received by the reporting institution
2.1 If the reporting institution has posted any HQLA collateral to a counterparty to secure
the institution’s payment obligations under a derivative contract, the institution may, for the reporting of item 1(a), offset the fair value of the posted collateral (after applying haircuts in the case of level 2A or level 2B assets) against the fair value of the contractual cash outflow to be paid by the institution under the contract. If the posted collateral is denominated in a currency which is different from that of the contractual cash outflow to be paid by the institution within the LCR period, convert the value of the posted collateral into the currency in which the contractual cash outflow is denominated.
2.2 Similarly, if the reporting institution has received any HQLA collateral from a
counterparty to secure the counterparty’s payment obligations to the institution under a derivative contract, and the collateral is included by the institution as HQLA for calculating its LCR, the institution must offset the fair value of the received collateral (after applying haircuts in the case of level 2A or level 2B assets) against the fair value of the contractual cash inflow to be received by the institution under the contract. If the received collateral is denominated in a currency which is different from that of the contractual cash inflow to be received by the institution within the LCR period, convert the value of the received collateral into the currency in which the contractual cash inflow is denominated.
2.3 For example –
(i) If Bank A has posted a USD-denominated level 2A asset with a fair value of USD100 (equivalent to HKD780) to a counterparty as collateral to secure Bank A’s payment obligations under Contract (I), Bank A is allowed to offset the post-haircut fair value of that asset (i.e. after applying a 15% haircut on the level 2A asset) against the contractual cash outflow to be paid by Bank A under Contract (I). The gross amount of contractual cash outflow arising from Contract (I) after collateral adjustment is equivalent to HKD312 (=EUR1009.75 – USD1007.8*85%). (ii) If Bank A has also received a HKD-denominated level 1 asset with a fair value of HKD1000 from a counterparty as collateral to secure the latter’s payment obligations under Contract (II), and the collateral is included by Bank A as level 1 asset in calculating its LCR, Bank A must calculate the contractual cash inflow arising from Contract (II) by offsetting the fair value of the level 1 asset (0% haircut in this case) received by it. The gross amount of contractual cash inflow arising from Contract (II) after collateral adjustment is equivalent to HKD125 (= JPY15000/13.33 – HKD1000).

MA(BS)1E / P.64 (01/2020)
After adjustments for the value of collateral posted or received by Bank A, item 1 of
Table 5 should be reported as follows:
(Unit: HKD’000 equivalent)
1. Gross amount of cash flows
(after collateral adjustments, if any)
Principal amount
Weight Weighted amount
Breakdown of weighted amount by currencies
HKD USD Other major $ RMB Other $
(a) Contractual cash outflows 2212 2212 0 0
1512
(= 312 +
1200)
0 700
(b) Contractual cash inflows 1769 1769 630 1014 125 0 0
2.4 If the collateral posted or received by the reporting institution is specific to a derivative
contract, the amount of collateral value to be deducted cannot exceed the amount of contractual cash outflow or contractual cash inflow generated from that contract.
2.5 If the reporting institution has posted a pool of assets (some of which may qualify for
inclusion as level 1, level 2A or level 2B assets) as collateral to a counterparty to secure the institution’s payment obligations under two or more derivative contracts, and there are no specific terms under the contracts regarding which of the assets within the pool should be assigned to cover which of the contracts, the institution should adopt the following assumptions:
(i) an asset within the pool of collateral is assumed to be used to offset the contractual cash outflow denominated in the same currency as that of the asset first; (ii) any remaining value of that asset is assumed to be used to offset the contractual cash outflows denominated in other currencies according to this order: (a) HKD; (b) USD; (c) “other major currencies” (i.e. EUR, JPY and GBP); (d) RMB; and (e) other currencies; and (iii) in determining the order of using different classes of asset in the pool of collateral posted by the institution to offset derivative cash outflows, the institution may apply an order in line with that specified in paragraph 22 of these CIs.
2.6 For the purposes of reporting contractual cash inflows arising from derivative contracts,
the assumptions set out in paragraph 2.5 of this Annex should also be applied to the treatment of collateral received by the reporting institution under derivative contracts. Item 2. Net amount of cash flows
3. Report in item 2 the amount, measured at fair value, of (a) contractual net cash outflows
to be paid, and (b) contractual net cash inflows to be received, by the reporting institution within the LCR period arising from derivative contracts entered into by the institution, if any of the adjustments set out below is applicable to the institution.

MA(BS)1E / P.65 (01/2020)
Offsetting of contractual cash flows under the same exchange rate contract
3.1 The contractual cash inflow and outflow arising from the same exchange rate contract
can be offset if the two amounts are fully exchanged on a simultaneous basis (or within the same day), irrespective of whether the contract is subject to a valid bilateral netting agreement. In the above example, assume that all of the derivative contracts between Bank A and Bank B are exchange rate contracts and, for each contract, the contractual cash outflow and inflow (after adjustment of collateral value if any) can be offset. Then the respective cash-flow positions of Bank A and Bank B under each of the contracts are adjusted as follows:
(Unit: HKD’000 equivalent)
Bank A Bank B
Contract (I) Net inflow = (USD1307.8) – (EUR1009.75 – USD1007.885%) = 702 (reported in currency column according to the currency denomination of the largest inflow leg, i.e. USD) Net outflow = 702 Contract (II) Net outflow = (JPY15000/13.33 – HKD1000) – (GBP10012) = 1075 (reported in the currency column according to the currency denomination of the largest outflow leg, i.e. GBP) Net inflow = 1075 Contract (III) Net outflow = HKD630 – AUD1007 = 70 (report in the currency column following the currency denomination of the largest outflow leg i.e. AUD) Net inflow = 70 Bank A should report in item 2 as follows:
(Unit: HKD’000 equivalent)
2. Net amount of cash flows Principal
amount
Weight Weighted amount
Breakdown of weighted amount by currencies
HKD USD Other major $ RMB Other $
(a) Contractual net cash outflows after adjustments (re Code of Practice, clause 12(3) & (4)) 1145 1145 0 0 1075 0 70 (b) Contractual net cash inflows after adjustments (re Code of Practice, clause 30(3) & (4)) 702 702 0 702 0 Offsetting of contractual cash flows across derivative contracts subject to a valid bilateral netting agreement
3.2 Contractual cash outflows and inflows arising from derivative contracts entered into by
the reporting institution with the same counterparty within the LCR period can be calculated on a net basis if the contracts are subject to a valid bilateral netting agreement entered into by the institution with that counterparty. In the above example, if the three derivative contracts entered into by Bank A with Bank B are subject to a valid bilateral netting agreement, their respective net cash-flow positions under each of the contracts (as calculated under paragraph 3.1 of this Annex) can be offset further, as demonstrated below:

MA(BS)1E / P.66 (01/2020)
(Unit: HKD’000 equivalent)
Bank A Bank B
Contracts (I),
(II) & (III)
Net outflow = 1075 + 70 – 702 = 443
(reported in the currency column according to the currency denomination of the largest outflow leg, i.e. GBP) Net inflow = 443 Bank A should therefore report under item 2:
(Unit: HKD’000 equivalent)
2. Net amount of cash flows Principal
amount
Weight Weighted amount
Breakdown of weighted amount by currencies
HKD USD Other major $ RMB Other $
(a) Contractual net cash outflows after adjustments (re Code of Practice, clause 12(3) & (4)) 443 100% 443 0 0 443 0 0 (b) Contractual net cash inflows after adjustments (re Code of Practice, clause 30(3) & (4)) 0 100% 0

MA(BS)1E / P.67 (01/2020)
Annex 6
Completion instructions for Table 6 of Section (II) – Calculation of expected cash outflow arising from potential loss in market value of posted collateral securing derivative contracts or other transactions

1. Report in item 1 of Table 6 the contracted amount of collateral (other than level 1 assets)
   posted by the reporting institution to its counterparty as required under a derivative contract or any other transaction (posted collateral). The contracted amount of posted collateral should be determined in accordance with the terms and valuation methodology that may be specified in the relevant contractual agreement. For example, if the relevant contractual agreement requires the posted collateral to be measured at market value subject to any haircut, the institution should report the post-haircut market value of the posted collateral in item 1 of Table 6.
2. If the reporting institution has received collateral which is not level 1 asset (received
   collateral) from the same counterparty (i.e. the one who has received the posted collateral), report the contracted amount of the received collateral in item 2 of Table 6, provided that the institution has an unrestricted right to re-hypothecate the received collateral but has not done so, nor has the institution counted the received collateral as HQLA in calculating its LCR. For example, Bank A (the reporting institution) has the following collateral positions arising from derivative contracts (or other transactions) entered into Bank B (the counterparty):
   (Unit: HKD’000 equivalent)
   Contract Collateral (other than level 1 assets) (contracted amount in HKD equiv.) HKD USD Other major $ RMB Other $ (I) Collateral posted 350 (II) Collateral posted 0 1000 (III) Collateral posted 0 250 0 (IV) Collateral received 0 0 200 (V) Collateral received 0 1100 Bank A should complete Table 6 as follows:
   (Unit: HKD’000 equivalent)
   Principal amount Weight Weighted amount
   Breakdown of weighted amount by currencies
   HKD USD Other major $ RMB Other $
   1 Collateral (other than level 1 assets) posted by the reporting institution to counterparties under derivative contracts or other transactions (posted collateral) 1600 (= 350

• 1000

2 Collateral (other than level 1 assets) received by the reporting institution from the same counterparties under derivative contracts or other transactions that can be deducted from item 1 (received collateral) 1300 (= 1100

• 200)
  3 Net amount of posted collateral
  (= Max (item 1 – item 2), 0)
  300 20% 60 10 50 0

MA(BS)1E / P.68 (01/2020)
3. The currency breakdown under item 3 of Table 6 is derived on the basis of the following
assumptions 62
–
(i) the received collateral denominated in a specific currency (e.g. USD) is used to offset with the posted collateral denominated in the same currency first. In the above example, (a) Bank A receives collateral denominated in USD (1100 HKD equivalent) which can cover the USD collateral posted by it fully (1000 HKD equivalent). An amount of “0” is therefore reported in the USD column; and (b) likewise, Bank A receives collateral denominated in “other major currencies” (200 HKD equivalent) but no collateral in these currencies has been posted by it. Therefore an amount of “0” is also reported in the column of “other major currencies”; (ii) the remaining value of received collateral (if any), after covering the posted collateral in the same currency, can be used to offset posted collateral denominated in other currencies. In such cases, the reporting institution may assume that the remaining value of the received collateral is used to offset posted collateral denominated in other currencies by order of: (a) HKD; (b) USD; (c) “other major currencies” (i.e. JPY, EUR, and GBP); (d) RMB; and (e) other currencies. In the above example, (a) the remaining value of received collateral denominated in USD and other major currencies (after offsetting against posted collateral in the same currency) can be used to cover posted collateral in HKD first. Therefore an amount of “10” is reported in the column of HKD (10 = (350 – (1100 –
1000) – 200)20%); and
(b) an amount of “50” is reported in the column of RMB (50 = 25020%).
4. If the received collateral is kept in a segregated account opened by the counterparty with
the reporting institution, the collateral in the account can only be used to offset outflows associated with payments that are eligible to be offset from the same account of the counterparty.

62 If the reporting institution intends to adopt internal assumptions and methodologies to report the currency breakdown of this cash outflow item in order to better reflect its liquidity risk profile and liquidity risk management practice, it should discuss with the MA in advance.

MA(BS)1E / P.69 (01/2020)
For example, if the USD-denominated collateral received by Bank A under Contract (V) (1100 HKD equivalent) is kept in a segregated account which is designated to cover payments under a specific contract exclusively (e.g. Contract (III), under which Bank A is obligated to post RMB-denominated collateral (250 HKD equivalent), the remaining value of USD-denominated collateral (1100 – 250) cannot be used to offset other collateral posted by Bank A. Therefore Bank A should report Table 6 as follows:
(Unit: HKD’000 equivalent)
Principal amount Weight Weighted amount
Breakdown of weighted amount by currencies
HKD USD Other major $ RMB Other $
1 Collateral (excluding level 1 assets) posted by the reporting institution to counterparties under derivative contracts or other transactions (posted collateral) 1600 (= 350

• 1000

2 Collateral (excluding level 1 assets) received by the reporting institution from the same counterparties under derivative contracts or other transactions that can be deducted from item 1 (received collateral) 450 (= 250

• 200)
  3 Net amount of collateral
  (= Max (item 1 – item 2), 0) 1150 20% 230 30 200 Adopting the assumptions set out in paragraph 3 of this Annex, the currency breakdown of item 3 in Table 6 is calculated as follows:
   HKD column: 30 = (350 – 200)*20%
   USD column: 200 = (1000 – 0)*20%
   RMB column: 0

5. In any circumstances, collateral received by the reporting institution from its
   counterparty should not be used to offset collateral posted by the institution to another counterparty.

MA(BS)1E / P.70 (01/2020)
Annex 7
Treatments of specific types of transactions under LMR A category 2 institution should adopt the following treatments for the LMR purposes:
(I) Foreign exchange transactions due for settlement within the LMR period
1.1 Spot currency trading
If a category 2 institution has conducted a currency trading transaction in the spot market which will be settled within the LMR period, the institution should calculate the amounts receivable and payable by it on a mark-to-market basis. In line with the general criteria for reporting of cash flows on a net basis under the LCR, the amounts receivable and payable by the institution within the LMR period arising from foreign exchange transactions may be reported on a net basis only if –  the amounts receivable and payable by the institution arise from the same transaction and both amounts will be settled simultaneously (i.e. on the same day) within the LMR period;  the amounts receivable and payable by the institution arise from the transactions and contracts with a counterparty who has established a valid bilateral netting agreement with the institution. The amounts receivable and payable by the institution (after allowable netting) should be reported in the relevant items in Part 3 of this Return according to the type of counterparty specified in Table (1):
Table (1): Reporting of amounts receivable and payable within the LMR period arising from
foreign exchange transactions
Type of counterparty Amount receivable Amount payable MA for account of Exchange Fund, or central bank Item (A3) or (C1) Item (B1) Bank Sub-item (A4)(a) or item (C2) Sub-item (A4)(b) or item (B2) Other customers Not included in any item (Note: amount receivable from customers arising from foreign exchange transaction is not regarded as “eligible loan repayment”) Item (B3)
1.2 For example, a category 2 institution has entered into a foreign exchange transaction to
purchase USD 1 million and sell HKD 7.76 million (i.e. the contractual exchange rate is 7.76) while the market exchange rate has changed to 7.8 on the LMR calculation date.

MA(BS)1E / P.71 (01/2020)
When the transaction is settled within the LMR period, the institution will receive USD 1 million (equivalent to HKD7.8 million on a mark-to-market basis) and pay HKD7.76 million. If the amounts receivable and payable by the institution are settled on the same day, the net amount receivable (equivalent to HKD 40,000 in this example) should be reported in the relevant item according to Table (1). (For the purpose of reporting the specific currency columns in Section (I) of Part 3 of this Return, report the net amount receivable in the currency leg in which the institution will receive money in that transaction. In this example, the net amount equivalent to HKD40,000 should be reported in the USD column.)
1.3 If the applicable market exchange rate is 7.75, the institution should include the net
amount payable (equivalent to HKD10,000) as one-month liability in the relevant item according to the type of counterparty, as specified in Table (1) above. (This net amount payable should be reported in the HKD column in this example.) (II) Derivative contracts
2.1 The treatment of contractual amount receivable and payable by a category 2 institution
within the LMR period arising from derivative contracts (including exchange rate contracts as defined in the BCR and other types of derivative contracts) is essentially the same as the treatment set out in Section (I) of this Annex. When the institution applies the applicable treatment to derivative contracts, the following points are note-worthy:
(a) The institution is only required to include contractual payments and receipts arising from the relevant contracts within the LMR period. Contingent claims or liabilities arising from derivative contracts are not considered for the LMR purposes. 63 (b) If a contract has its final maturity date (taking into account any possibility of early settlement) falling within the LMR period (i.e. all cash flows arising from the remaining life of that contract will occur within the LMR period), the fair value of that contract can be taken as the contractual amount receivable or payable by the institution arising from that contract. (c) If a contract has its final maturity date falling after the LMR period but it will generate cash flows within the LMR period (e.g. in case of periodic cash flows

63 A contingent claim and liability arising from an exchange rate contract or a derivative contract means a claim or liability of which the materialisation is contingent upon the occurrence of specific event(s) defined in a contract. Whilst there are specific requirements under the LCR for category 1 institutions to include certain types of contingent cash flows arising from derivative contracts (or other transactions), such as expected cash outflows arising from derivative contracts (or other transactions) that have material adverse event clauses, contingent claims and liabilities arising from derivative contracts are not considered under the LMR.

MA(BS)1E / P.72 (01/2020) under a swap or any similar contract), only the cash flows within the LMR period are included for LMR purposes. (d) If a contract will not generate any cash flows within the LMR period, that contract does not need to be considered for LMR purposes. The amounts receivable and payable by the institution (after allowable netting) arising from derivative contracts within the LMR period should be reported in the relevant items in Part 3 of this Return according to the type of counterparty specified in Table (2):
Table (2): Reporting of amounts receivable and payable within the LMR period arising from
derivative contracts
Type of counterparty
Amount receivable Amount payable
MA for account of
Exchange Fund, or central bank
Item (A3) or (C1) Item (B1)
Bank Sub-item (A4)(a) or item (C2) Sub-item (A4)(b) or item (B2) Other customers Not included in any item (Note: amount receivable from customers arising from derivative contracts is not regarded as “eligible loan repayment”) Item (B3) (III) Securities transactions awaiting settlement within the LMR period
3.1 Purchase of securities
(a) The asset purchased is a liquefiable asset – (i) In case of a spot purchase, report the asset as a liquefiable asset, considering that an asset, once purchased, can usually be monetized readily by sale in spot market immediately. The corresponding amount payable by the institution within the LMR period is the institution’s one-month liability, which should be reported according to the type of counterparty by reference to Table (3).

MA(BS)1E / P.73 (01/2020)
Table (3): Reporting of amounts receivable and payable within the LMR period arising from
securities purchase or sale
Type of counterparty Amount receivable Amount payable MA for account of Exchange Fund, or central bank Item (A3) or (C1) Item (B1) Bank Sub-item (A4)(a) or item (C2) Sub-item (A4)(b) or item (B2) Other customers Not included in any item (Note: amount receivable from customers arising from sale of securities is not regarded as “eligible loan repayment”) Item (B3) (ii) in case of a forward purchase, the asset is usually not readily available to be monetized. In these circumstances, the asset to be received cannot be treated as a liquefiable asset. If the asset will be delivered to the institution within the LMR period, the corresponding amount payable by the institution within the LMR period can be disregarded for LMR purposes. Otherwise, the corresponding amount payable within the LMR period must be reported as a one-month liability according to the relevant type of counterparty by reference to Table (3). (b) The asset purchased is not a liquefiable asset – No liquefiable asset can be reported, but report the corresponding amount payable within the LMR period as a one-month liability to the relevant type of counterparty by reference to Table (3).
3.2 Sale of securities
(a) The asset sold is a liquefiable asset –
(i) In case of a spot sale, the asset sold cannot be reported as a liquefiable asset because it has already been removed from the institution’s balance sheet on the trade day. (ii) In case of a forward sale, the asset cannot be included in the stock of liquefiable asset if the institution is contractually obliged to deliver that asset to its counterparty within the LMR period. (iii) If a spot or forward sale will generate any amount receivable by the institution within the LMR period, report that amount according to the type of counterparty by reference to Table (3). (b) The asset sold is not a liquefiable asset – Irrespective of whether the asset is sold in a spot market or under a forward contract, neither the asset nor the

MA(BS)1E / P.74 (01/2020) corresponding amount receivable within the LMR period can be included in the calculation of the LMR. A stricter approach is adopted for the sale of non￾liquefiable assets in general (i.e. not restricted to securities). Non-liquefiable assets can be converted to liquefiable assets by sale only upon the receipt of cash. (IV) Forward forward deposits
4.1 Under a forward forward deposit transaction (or any similar type of forward borrowing
or lending transaction) where a category 2 institution is the fund provider, it has a contractual obligation to place a specified amount of funds to its counterparty on a specified day (Day P) until the placement falls due and repaid by the counterparty to the institution (on Day T). If the institution is a fund taker in that transaction, it would have cash flow positions opposite to the above.
4.2 As a general principle, all amounts receivable and payable by the institution within the
LMR period arising from a forward forward deposit transaction must be included in the calculation of the LMR. The specific treatment of this type of transaction is set out below:
(a) If both Day P and Day T fall within the LMR period, report the cash flows on Day P and Day T on a gross basis 64. Netting is allowed only if the cash flows arising from transactions with a counterparty are subject to a valid master netting agreement. (b) If Day P falls within the LMR period but Day T does not, include the cash flow on Day P only for calculating the LMR. (c) If both Day P and Day T fall after of the LMR period, the transaction is not considered under the LMR.
4.3 The amounts receivable and payable by the institution within the LMR period should be
reported in the relevant items according to Table (4):

64 As the cash flows arising from a forward forward deposit transaction are generated in different dates (i.e. Day P and Day T respectively), netting of such cash flows at the transaction level is not allowed.

MA(BS)1E / P.75 (01/2020)
Table (4): Reporting of amounts receivable and payable within the LMR period arising from
forward forward deposit transactions
Type of counterparty Amount receivable Amount payable MA for account of Exchange Fund, or central bank Item (A3) or (C1) Item (B1) Bank Sub-item (A4)(a) or item (C2) Sub-item (A4)(b) or item (B2) Other customers Item (C4) 65 Item (B3) (V) Repo-style transactions
5.1 Where the risks and rewards ARE NOT substantially transferred to the buyer
5.1.1 Repo transaction due to unwind within the LMR period
(a) Repo subject is a liquefiable asset
Both the repo subject and the amount payable arising from the repo transaction should be excluded from the reporting of liquefiable assets and qualifying liabilities respectively. 66 (b) Repo subject is not a liquefiable asset Disregard the repo subject; report the amount payable by the institution within the LMR period as a one-month liability according to the type of counterparty. Please refer to Table (5).
Table (5): Reporting of amounts receivable and payable within LMR period arising from repo
and reverse repo transactions
Type of counterparty Amount receivable Amount payable MA for account of Exchange Fund, or central bank Item (A3) or (C1) Item (B1) Bank Item (A4)(a) or (C2) Item (A4)(b) or (B2) Other customers Item (C4) Item (B3)

65 Deposit is regarded as a loan of money placed by a person to another person. Therefore amounts receivable arising from a forward forward deposit transaction can be treated as “eligible loan repayment” if the applicable criteria are met fully. 66 The repo subject remains on the balance sheet of the reporting institution but cannot be reported as a liquefiable asset because it is not free from encumbrances. The corresponding account payable need not be reported as a qualifying liability because the future cash outflow will bring in a liquefiable asset and the institution's liquidity position will not change in essence (apart from the possible difference in LCF). In other words, once the account payable is settled, the repo subject immediately ceases to be “encumbered” and can be reported as a liquefiable asset.

MA(BS)1E / P.76 (01/2020)
5.1.2 Reverse repo transaction due to unwind within the LMR period
As the reverse repo subject cannot be re-hypothecated by the institution, the asset cannot be claimed by the institution as a liquefiable asset. Report the amount receivable by the institution within the LMR period according to the type of counterparty. Please refer to Table (5).
5.1.3 Repo transaction due to unwind beyond the LMR period
(a) Repo subject is a liquefiable asset
Same treatment for the repo subject as in scenario 5.1.1(a).
No qualifying liability arises from the transaction since the corresponding account payable does not fall due within the LMR period. (b) Repo subject is not a liquefiable asset Same treatment of repo subject as in scenario 5.1.1(b). No qualifying liability arises from the transaction since the corresponding account payable does not fall due within the LMR period.
5.1.4 Reverse repo transaction due to unwind beyond the LMR period
Same treatment of the reverse repo subject as in scenario 5.1.2.
The corresponding account receivable is not included in the calculation of the LMR since it is a claim due beyond the LMR period.
5.2 Where the risks and rewards ARE substantially transferred to the buyer
The reporting treatment set out below is to be applied to repo / reverse repo transactions where securities are sold / purchased subject to a repurchase / resale agreement, the terms of which transfer substantially all risks and rewards of ownership to the buyer and the transaction is separately accounted for as an outright sale / purchase and a commitment to repurchase / sell back. Where the price for the commitment to repurchase / sell back has not been determined, the fair value (e.g. current market value) of the securities concerned should be used.

MA(BS)1E / P.77 (01/2020)
5.2.1 Repo transaction due to unwind within the LMR period
(a) Repo subject is a liquefiable asset
The treatment is the same as under scenario 5.1.1(a). Both the repo subject and the commitment to repurchasing the repo subject should be excluded from the reporting of liquefiable assets and qualifying liabilities respectively. (b) Repo subject is not a liquefiable asset Disregard the repo subject; report the institution’s commitment to repurchasing the repo subject within the LMR period as a one-month liability according to the type of counterparty. Please refer to Table (5).
5.2.2 Reverse repo transaction due to unwind within the LMR period
(a) Reverse repo subject is a liquefiable asset As the reverse repo subject is purchased under an outright transaction, it may be included as a liquefiable asset (if the other applicable criteria are met fully). The future cash inflow brought about by the corresponding commitment to sell back should not be reported as a liquefiable asset (or amount receivable) because it will be offset by the simultaneous future outflow of the liquefiable asset (the reverse repo subject). (b) Reverse repo subject is not a liquefiable asset As the reverse repo subject acquired is not a liquefiable asset, there is no change to the institution’s liquefiable assets. Reporting of the future cash inflow brought about by the corresponding commitment to sell back depends on the type of counterparty to the transaction. Please refer to Table (5).
5.2.3 Repo transaction due to unwind beyond the LMR period
(a) Repo subject is a liquefiable asset
Same treatment for the repo subject as in scenario 5.2.1(a).
No qualifying liability arises from the transaction since the corresponding commitment to repurchase does not fall due within the LMR period.

MA(BS)1E / P.78 (01/2020)
(b) Repo subject is not a liquefiable asset
Same treatment for the repo subject as in scenario 5.2.1(b).
No qualifying liability arises from the transaction since the corresponding commitment to repurchase does not fall due within the LMR period.
5.2.4 Reverse repo transaction due to unwind beyond the LMR period
(a) Reverse repo subject is a liquefiable asset Same treatment for the reverse repo subject as in scenario 5.2.2(a). No qualifying liability arises from the transaction. (b) Reverse repo subject is not a liquefiable asset Same treatment for the reverse repo subject as in scenario 5.2.2(b). No qualifying liability arises from the transaction.

MA(BS)1E / P.79 (01/2020)
Annex 8
Examples for reporting of due to/from the MA for the account of the Exchange Fund, central banks and banks under LMR (I) Reporting of due to / from central banks Assume Bank A and Bank B have the following positions:
Bank A Bank B
Usable on demand or within
24 hours
Mature in LMR period*
Usable on demand or within
24 hours
Mature in LMR period*
Due from central banks 80 160 20 40
Due to central banks 50 100 60 120

• Not usable on demand or within 24 hours
  The two banks should report their respective positions as follows:
  Items
  Bank A Bank B
  Principal amount Weighted amount Principal amount Weighted amount (A3) 80 80 20 20 (B1) 150 (= 50 + 100) 150 180 = (60 + 120) 180 (C1) 160 160 40 40 (II) Reporting of due to / from banks Assume Bank A and Bank B have the following positions:
  Bank A Bank B

• Due from banks maturing in the LMR period 100 20
• Due to banks maturing in the LMR period 20 100
• Qualifying liabilities (before deductions) 150 150
  The two banks should report their respective positions as follows:
  Items
  Bank A (Net due from banks in
  1 month > 0)
  Bank B (Net due to banks in 1 month > 0)
  Principal amount Weighted amount Principal amount Weighted amount (A4)(a) 100 No need to report item (A4) (A4)(b) 20 (A4)(c) 80 (= 100 – 20) 60 = Min {(100-20)80%, (15040%)} (B2) No need to report items (B2) and (C2) 100 100 (100% LCF) (C2) 20 20 (100% LCF) (C3) 4 (= 80*80% – 60) n.a.

---

under the Banking Ordinance
STABLE FUNDING POSITION OF AN AUTHORIZED INSTITUTION

• (HONG KONG OFFICE / UNCONSOLIDATED / CONSOLIDATED) BASIS
  For the quarter ended on ...................................................
  Date of Submission
  Category 1 institution
  Category 2A institution
  (Please tick)
  The Banking Ordinance
  Chief Accountant Chief Executive
  Name Telephone Number
  MA(BS)26 (01/2020)
  We certify that the information reported in this Return is, to the best of our knowledge and belief, correct. The institution has been designated by the Monetary Authority under the Banking (Liquidity) Rules as a Name and telephone number of responsible person who may be contacted by the Monetary Authority in case of any query. This Return is reported under section 63(2) of the Banking Ordinance. The Return should be submitted to the Monetary Authority quarterly within the timeline specified in the Completion Instructions (CIs). Note : This Return should be prepared in accordance with the CIs. An authorized institution designated by the Monetary Authority as a category 1 institution, or a category 2A institution, must complete the relevant parts of the Return where applicable. NS SECRET Co. No. MM YY CAT. (For Official Use Only) Name of Authorized Institution

PART 1 – SUMMARY CERTIFICATE
(I)
1. [Yes / No]
2.
(a) [dd/mm/yyyy]
(b) %
(c) %
(d) %
(II)
(HK$'000 or %) mm/yyyy
1.
2.
3. #DIV/0! #DIV/0! #DIV/0!
Reporting of average CFR by category 2A institutions Average ACF Average RCF Average CFR Reporting of NSFR shortfall by category 1 institutions Did the institution apply rule 8B to self-rectify NSFR shortfall during the quarter? If the answer to item 1 is "Yes", complete sub-items (a) to (d) below. First shortfall day NSFR on the first shortfall day NSFR on the expiry day of the self-rectification period Lowest NSFR during the self-rectification period

Part 2 – NET STABLE FUNDING RATIO
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
(a) Tier 1 capital (before regulatory adjustments) 0 (b) Tier 2 capital (before regulatory adjustments) 0% 50% 100% 100% 0 (c) minority interests not covered by sub-item (a) or (b) 0% 50% 100% 100% 0 (d) capital instruments not covered by sub-item (a), (b) or (c) 0% 50% 100% 100% 0 2 0% 50% 100% 100% 0 (a) stable retail deposits 95% 95% 100% 0 (b) retail deposits not covered by sub-item (a) 90% 90% 100% 0 (a) stable small business funding 95% 95% 100% 0 (b) small business funding not covered by sub-item (a) 90% 90% 100% 0 5 50% 50% 100% 0 (a) corporates (other than small business customers), sovereigns, multilateral development banks, national development banks and public sector entities 50% 50% 100% 0 (b) the Monetary Authority for the account of the Exchange Fund or central banks 0% 50% 100% 0 (c) financial institutions and other entities not covered by sub-item (a) or (b) 0% 50% 100% 0 7 0% 50% 100% 0% 0 8 0% 50% 100% 0 9 0 0% 0 10 0% 0 11 0 12 0 Weighted amount AVAILABLE STABLE FUNDING (ASF) Value ASF factor Debt securities or prescribed instruments issued by the institution 100% Reported according to remaining term to maturity Determined according to remaining term to maturity (I) 1 Capital Funding provided to the institution not covered by items 1 to 6 3 6 Operational deposits Funding (other than operational deposits) provided to the institution by – 4 Small business funding Retail deposits TOTAL AMOUNT OF ASF 0% Deferred tax liabilities Trade-date payables Net derivative liabilities (as calculated in Annex 1, item 8) Liabilities not covered by items 1 to 10

Part 2 – NET STABLE FUNDING RATIO
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
(A)
1
0% 0
(a)
0
(b)
0% 0
(c)
(i) loans that are subject to a risk-weight of 20% or less under section 55(2) of the Capital Rules 50% 65% 65% 0 (ii) loans not covered by sub-sub-item (i) 50% 85% 85% 0 (a) 0 (b) 0 (c) 0 (d) 50% 50% 85% 85% 0 (e) 85% 0 4 85% 0 5 50% 50% 100% 100% 0 (a) 10% 50% 100% 100% 0 (b) 15% 50% 100% 100% 0 2 3 Claims on the Monetary Authority for the account of the Exchange Fund or central banks level 2B assets level 2A assets loans provided by the institution to the Monetary Authority for the account of the Exchange Fund or central banks, having a remaining term to maturity of 6 months or more claims on the Monetary Authority for the account of the Exchange Fund or central banks not covered by sub-item (a), having a remaining term to maturity of less than 6 months or being repayable on demand funds placed with the institution's HKD CHATS Account, or with central banks to meet reserve requirements loans and funds not covered by sub-item (a) 50% Loans and funds (other than operational deposits) provided by the institution to other financial institutions 7 Loans and funds provided by the institution to retail customers and wholesale customers (other than the Monetary Authority for the account of the Exchange Fund, central banks and financial institutions) (II) REQUIRED STABLE FUNDING (RSF) Value RSF factor Currency notes and coins Physical traded commodities held by the institution Securities held by the institution (other than securities representing the institution's claims covered by item 2(b)) level 1 assets debt securities not covered by sub-item (a), (b) or (c) Operational deposits placed by the institution at other financial institutions 6 loans and funds secured by level 1 assets listed equities not covered by sub-item (c) Reported according to remaining term to maturity Determined according to remaining term to maturity Unencumbered assets, off-balance sheet obligations and total derivative liabilities (before adjustments) Weighted amount 0% 5% 15%

Part 2 – NET STABLE FUNDING RATIO
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
(II) REQUIRED STABLE FUNDING (RSF) Value RSF factor Reported according to remaining term to maturity Determined according to remaining term to maturity Unencumbered assets, off-balance sheet obligations and total derivative liabilities (before adjustments) Weighted amount (a) 50% 50% 65% 65% 0 (b) 50% 50% 85% 85% 0 (a) 0 (b) 0 9 0 100% 0 10 0% 0 11 (a) 0 (b) 50% 50% 100% 0 12 0 13 5% 0 (B) 0 14 0 (III) #DIV/0! 100% 85% Encumbered assets (as calculated in Annex 3) Off-balance sheet obligations (as calculated in Annex 2, item 5) other assets that have specified terms to maturity Assets not covered by items 1 to 10 7 loans and funds not covered by sub-item (a) Assets posted by the institution as initial margins or default fund contributions Net derivative assets (as calculated in Annex 1, item 7) Trade-date receivables assets that would have been subject to an RSF factor of 100% had it not been posted by the institution assets not covered by sub-item (a) 8 loans and funds that are subject to a risk-weight of 35% or less under Division 3 of
Part 4 of the Capital Rules
Total derivative liabilities (before adjustments) NET STABLE FUNDING RATIO (%) TOTAL AMOUNT OF RSF fixed assets, investments in associated entities and other unlisted equities, goodwill and other intangible assets, assets of any defined benefit pension fund or plan, investments in own capital instruments (if not derecognized under applicable accounting standards), insurance assets, retained interests, non-performing assets, and other assets that do not have specified terms to maturity 100%

Part 3 – CORE FUNDING RATIO
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
1
(a) Tier 1 capital (before regulatory adjustments) 0 (b) Tier 2 capital (before regulatory adjustments) 0% 50% 100% 100% 0 (c) minority interests not covered by sub-item (a) or (b) 0% 50% 100% 100% 0 (d) capital instruments not covered by sub-item (a), (b) or (c) 0% 50% 100% 100% 0 2 0% 50% 100% 100% 0 3 80% 90% 100% 0 4 0% 50% 100% 0% 0 5 0% 50% 100% 0 6 0 0% 0 7 0% 0 8 0 9 0 Weighted amount Capital Deferred tax liabilities Debt securities or prescribed instruments issued by the institution Deposits Funding provided to the institution not covered by item 1, 2 or 3 Reported according to remaining term to maturity Determined according to remaining term to maturity (I) AVAILABLE CORE FUNDING (ACF) Value ACF factor 100% TOTAL AMOUNT OF ACF Trade-date payables Net derivative liabilities (as calculated in Annex 1, item 8) Liabilities not covered by items 1 to 7 0%

Part 3 – CORE FUNDING RATIO
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
1
0% 0
2
0% 0
3
0
4
0% 50% 100% 0
5
(a) securities or prescribed instruments mentioned in item 6 of Table A in section 2 of Schedule 5 to the Banking (Liquidity) Rules 0 (b) listed ordinary shares mentioned in item 5(ab) of Table 4 to Schedule 6 to the Banking (Liquidity) Rules 0 (c) securities or prescribed instruments not covered by sub-items (a) and (b) 0% 50% 100% 100% 0 6 0% 50% 100% 100% 0 7 (a) residential mortgage loans mentioned in item 7 of Table A in section 2 of
Schedule 5 to the Banking (Liquidity) Rules 0
(b) loans and funds provided to customers not covered by sub-item (a) 0% 50% 100% 100% 0 8 0 100% 0 9 0% 0 10 (a) fixed assets, investments in associated entities and other unlisted equities, goodwill and other intangible assets, assets of any defined benefit pension fund or plan, investments in own capital instruments (if not derecognized under applicable accounting standards), insurance assets, retained interests, non￾performing assets, and other assets that do not have specified terms to maturity 0 (b) other assets that have specified terms to maturity 0% 50% 100% 0 11 0 12 5% 0 13 0 (III) #DIV/0! TOTAL AMOUNT OF RCF CORE FUNDING RATIO (%) Reported according to remaining term to maturity Determined according to remaining term to maturity 0% Off-balance sheet obligations (as calculated in Annex 2, item 5) Assets not covered by items 1 to 9 100% Net derivative assets (as calculated in Annex 1, item 7) Trade-date receivables (II) REQUIRED CORE FUNDING (RCF) Value RCF factor Loans and funds provided by the institution to banks Export bills Securities or prescribed instruments held by the institution 0% 0% Total derivative liabilities (before adjustments) Weighted amount Currency notes and coins Gold bullion Claims on, or reserves maintained with, the Monetary Authority for the account of the Exchange Fund or central banks 0% Loans and funds provided by the institution to customers (other than the Monetary Authority for the account of the Exchange Fund, central banks and banks)

Annex 1 – Derivative assets, liabilities and margins
(HK$'000)
Value
1
2
2A
3
0
4
5
6
0
7
0
8
0
Net derivative assets (if (item 3 - item 6) is positive) Total derivative liabilities (after adjustments) Net derivative liabilities (if (item 3 - item 6) is negative) Memorandum item: Non-cash variation margin received by the institution under the derivative contracts covered by item 1 Total derivative assets Cash variation margin received by the institution under the derivative contracts covered by item 1 Total derivative assets (after adjustments) Total derivative liabilities Variation margin posted by the institution under the derivative contracts covered by item 4

Annex 2 – Off-balance sheet obligations
(HK$'000)
Value RSF / RCF factor Weighted amount
1 5% 0
2 0% 0
3 0% 0
4 0% 0
5 TOTAL 0
Guarantees and letters of credit unrelated to trade-related contingencies Potential drawdown of undrawn committed facilities Potential drawdown of uncommitted facilities Trade-related contingencies

Annex 3 – Encumbered assets
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
(A) 0% 0
(B) 50% 0
(C) 100% 0
(a)
(b)
(A) 0% 0
(B) 50% 0
(C) 100% 0
(c)
(A) 50% 65% 65% 0
(B) 50% 65% 65% 0
(C) 100% 100% 100% 0
(A) 50% 85% 85% 0
(B) 50% 85% 85% 0
(C) 100% 100% 100% 0
(a)
(A) 0
(B) 0
(C) 0
(b)
(A) 0
(B) 0
(C) 0
(c)
(A) 0
(B) 0
(C) 0
(d)
(ii)
5%
50%
Weighted amount
Determined according to remaining term to maturity Value RSF factor Currency notes and coins, encumbered for - Reported according to remaining term to maturity funds placed with the institution's HKD CHATS Account, or with central banks to meet reserve requirements claims on the Monetary Authority for the account of the Exchange Fund or central banks not covered by sub-item (a), having a remaining term to maturity of less than 6 months or being repayable on demand, encumbered for - loans provided by the institution to the Monetary Authority for the account of the Exchange Fund or central banks, having a remaining term to maturity of 6 months or more 2 Claims on the Monetary Authority for the account of the Exchange Fund or central banks loans that are subject to a risk-weight of 20% or less under section 55(2) of the Capital Rules, encumbered for - loans not covered by sub-sub-item (i), encumbered for - 6 months to less than 12 months 12 months or more 1 less than 6 months 6 months to less than 12 months less than 6 months 6 months to less than 12 months less than 6 months 12 months or more 12 months or more less than 6 months 6 months to less than 12 months 12 months or more 12 months or more less than 6 months (i) Securities held by the institution (other than securities representing the institution's claims covered by item 2(b)) 12 months or more 3 6 months to less than 12 months debt securities not covered by sub-item (a), (b) or (c), encumbered for - less than 6 months 6 months to less than 12 months 12 months or more less than 6 months 6 months to less than 12 months level 1 assets, encumbered for - level 2A assets, encumbered for - level 2B assets, encumbered for - 100% 100% 15% 50% 50% 50% 100%

Annex 3 – Encumbered assets
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
Weighted amount
Determined according to remaining term to maturity Value RSF factor Currency notes and coins, encumbered for - Reported according to remaining term to maturity 1 (A) 50% 50% 85% 85% 0 (B) 50% 50% 85% 85% 0 (C) 100% 100% 100% 100% 0 (e) (A) 85% 0 (B) 85% 0 (C) 100% 0 (A) 85% 0 (B) 85% 0 (C) 100% 0 (A) 50% 50% 100% 100% 0 (B) 50% 50% 100% 100% 0 (C) 100% 100% 100% 100% 0 (a) (A) 10% 50% 100% 100% 0 (B) 50% 50% 100% 100% 0 (C) 100% 100% 100% 100% 0 (b) (A) 15% 50% 100% 100% 0 (B) 50% 50% 100% 100% 0 (C) 100% 100% 100% 100% 0 (a) (A) 50% 50% 65% 65% 0 (B) 50% 50% 65% 65% 0 (C) 100% 100% 100% 100% 0 (b) (A) 50% 50% 85% 85% 0 (B) 50% 50% 85% 85% 0 (C) 100% 100% 100% 100% 0 listed equities not covered by sub-item (c), encumbered for - less than 6 months Loans and funds provided by the institution to retail customers and wholesale customers (other than the Monetary Authority for the account of the Exchange Fund, central banks and financial institutions) less than 6 months 6 months to less than 12 months 12 months or more less than 6 months Physical traded commodities held by the institution, encumbered for - Operational deposits placed by the institution at other financial institutions, encumbered for - less than 6 months 6 months to less than 12 months less than 6 months 6 months to less than 12 months 5 less than 6 months 6 months to less than 12 months 3 loans and funds secured by level 1 assets, encumbered for - 12 months or more Loans and funds (other than operational deposits) provided by the institution to other financial institutions 4 12 months or more 12 months or more 6 months to less than 12 months 12 months or more loans and funds that are subject to a risk-weight of 35% or less under Division 3 of Part 4 of the Capital Rules, encumbered for - 12 months or more 6 loans and funds not covered by sub-item (a), encumbered for - 12 months or more 6 months to less than 12 months 7 6 months to less than 12 months 6 months to less than 12 months less than 6 months less than 6 months 12 months or more loans and funds not covered by sub-item (a), encumbered for -

Annex 3 – Encumbered assets
(HK$'000)
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
< 6 months or repayable on demand
6 months to <12 months 12 months or more
No specified term to maturity
Weighted amount
Determined according to remaining term to maturity Value RSF factor Currency notes and coins, encumbered for - Reported according to remaining term to maturity 1 (a) (b) 9 (A) 0% 0 (B) 50% 0 (C) 100% 0 (a) (A) 0 (B) 0 (C) 0 (b) (A) 50% 50% 100% 0 (B) 50% 50% 100% 0 (C) 100% 100% 100% 0 12 TOTAL AMOUNT OF ENCUMBERED ASSETS 0 Trade-date receivables, encumbered for - less than 6 months less than 6 months 6 months to less than 12 months 12 months or more 10 6 months to less than 12 months 12 months or more 8 Assets posted by the institution as initial margins or default fund contributions assets that would have been subject to an RSF factor of 100% had it not been posted by the institution, encumbered for - assets not covered by sub-item (a), encumbered for - Net derivative assets 6 months to less than 12 months 12 months or more other assets that have specified terms to maturity, encumbered for - less than 6 months Assets not covered by items 1 to 10 fixed assets, investments in associated entities and other unlisted equities, goodwill and other intangible assets, assets of any defined benefit pension fund or plan, investments in own capital instruments (if not derecognized under applicable accounting standards), insurance assets, retained interests, non-performing assets, and other assets that do not have specified terms to maturity, encumbered for - 11 100% 100% 100%

Annex 4 – Interdependent assets and liabilities
(HK$'000)
Item No. Type of asset Type of liability Value Date of the Monetary Authority's permission 1 2 3 4 5 6 7 8 9 10 (Additional rows may be added if space provided is insufficient)

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MA(BS)26 / P.1 (01/2020)
Completion Instructions
Return of Stable Funding Position of an Authorized Institution (MA(BS)26) INTRODUCTION

1. This document provides instructions for category 1 institutions and category 2A
   institutions to calculate and report the Net Stable Funding Ratio (NSFR) and Core Funding Ratio (CFR) respectively by using Return MA(BS)26. The terms used in this document should be ascribed to the interpretations provided in the Banking (Liquidity) Rules (BLR) unless otherwise specified.
2. The Return consists of 3 Parts:
    Part 1 captures certain key information relating to the reporting institution’s NSFR or CFR during the quarterly reporting period.  Part 2 captures the details pertaining to the calculation of the NSFR on the quarter-end date. This Part should be completed by all category 1 institutions.  Part 3 captures the details pertaining to the calculation of the CFR on the quarter-end date. This Part should be completed by all category 2A institutions. GENERAL INSTRUCTIONS Bases of Reporting
3. A reporting institution should complete this Return on one or more of the following
   bases as the case may require –
    Hong Kong office basis for every reporting institution irrespective of its place of incorporation;  unconsolidated basis for a locally incorporated institution that is subject to rule 10(1)(b) of the BLR for the purpose of NSFR or CFR;

MA(BS)26 / P.2 (01/2020)
 consolidated basis for a locally incorporated institution that is subject to rule 11(1) for the purpose of NSFR or CFR. Reporting frequency and submission timeline
4. A reporting institution should submit this Return (with a separate copy for each
applicable reporting basis) to the HKMA quarterly according to the following timelines:
For the quarter ended on –
31 March 30 June 30 September 31 December
Submission timeline for –

• Hong Kong office basis 30 April 31 July 31 October 31 January of the
  following year
• Unconsolidated basis and
  consolidated basis
  6 weeks immediately after the end of each quarter If the submission timeline does not fall on a working day, it will be deferred to the immediately following working day. Valuation of assets, liabilities and off-balance sheet items

5. For the calculation of the NSFR or CFR:
    the value of a derivative contract should be measured at replacement cost as defined in rule 54(1);  other on-balance sheet assets and liabilities (including capital) should be measured in the following ways –

• marketable assets should be measured by fair value irrespective of the
  applicable accounting standards;
• assets that are not marketable and liabilities 1
  should be measured by book value (including any accrued interest 2 where applicable) according to the applicable accounting standards; and

1
In this document, the meaning of “liability” includes capital unless otherwise specified. 2 “Accrued interest” means the amount of interest accrued on an asset or liability up to the Return’s position date. In general, accrued interest and the underlying asset or liability should be reported under the same item. Whether accrued interest and the underlying asset or liability can be reported under the same time bucket will depend on the timing of interest receipt or payment. For example, if an institution has granted a

MA(BS)26 / P.3 (01/2020)
 off-balance sheet obligations should be measured according to the contracted amount of an obligation or, in the case of an undrawn or partially drawn facility, the undrawn amount. The valuation should be based on the “trade-date approach”.
6. To avoid doubt, forward deposit or forward loan (including forward placements with
any counterparties) should be included in the calculation of the NSFR or CFR as soon as the reporting institution enters into the relevant transaction. For example, if the institution enters into a forward interbank placement transaction on 31 December 2018 and the placement will mature on 31 December 2019, the institution should include the placement in the calculation of its NSFR (or CFR) at the position of 31 December 2018. The placement should be reported according to its final maturity date (31 January 2019), which would fall under the time bucket of “12 months or more”. Reporting currencies
7. The figures to be reported in this Return should be rounded up to the nearest thousand
in Hong Kong dollars (HKD), or HKD equivalent in the case of foreign currency items. The closing middle market T/T rates prevailing at the close of business on the position date should be used for conversion purposes. Determination of “remaining term to maturity”
8. For determining the “remaining term to maturity”, reference should be made primarily
to the contractual term to maturity of the item unless otherwise specified (Ref: NSFR FAQ 20). Example of date count: If an institution calculates its NSFR (or CFR) for the position of 31 December 2018, an asset or liability item maturing between 30 June 2019 and 30 December 2019 (both days inclusive) should be reported as having a remaining term to maturity of 6 months to less than 12 months. An item maturing on 31 December 2019 should be reported as having remaining term to maturity of 12 months or more.
9. If an asset or liability item will mature by instalments (e.g. instalment loan, or debt
securities or capital instruments that will be redeemed in phases), it should be reported according to the remaining term to maturity of each instalment. (Ref: NSFR FAQ 25)

loan that has a remaining term to maturity of 12 months while the interest accrued on the loan will be payable to the institution in one month, that amount of accrued interest should be reported under the time bucket of “< 6 months or repayable on demand”, whilst the loan should be reported under the time bucket of “12 months or more”.

MA(BS)26 / P.4 (01/2020)
10. If a reporting item is embedded with options that may alter its maturity date,
determine the remaining term to maturity as follows:
 For an ASF or ACF item that is callable –

• at the option of the reporting institution – assume the option would be
  exercised if the market has such an expectation or if the otherwise may cause reputational concerns; 3
• at the option of a person other than the institution – assume the option
  would be exercised.
  4
  (Ref: Rules 65(6) and 77(6))
   For an ASF or ACF item that is extendable –
• at the option of the reporting institution – assume the option would not
  be exercised if the market has such an expectation or if the otherwise may cause reputational concerns;
• at the option of a person other than the institution – assume the option
  would not be exercised.
  (Ref: NSFR FAQ 27)
   For an RSF or RCF item that is extendable –
• at the option of the reporting institution – assume the option would be
  exercised if the market has such an expectation or if the otherwise may cause reputational concerns 5
• at the option of a person other than the institution – assume the option
  would be exercised.
  6

3 For example, debt securities issued by the institution, which can be redeemed early at the option of the institution. 4 For example, deposits taken by the institution, where the timing of deposit withdrawal is determined at the option of depositors. 5 For example, an institution’s nostro balance placed at another bank, where the timing of withdrawing or using the balance is determined at the option of the institution. 6 For example, non-maturity loan granted by an institution. Please refer to the specified instructions provided in paragraphs 58 and 59 for the reporting of non-maturity loans.

MA(BS)26 / P.5 (01/2020)
(Ref: Rules 68(5) and 80(5))
 For an RSF item that is callable–

• at the option of the reporting institution – assume the option would not
  be exercised if the market has such an expectation or if the otherwise may cause reputational concerns;
• at the option of a person other than the institution – assume the option
  would not be exercised.
  No double counting of reported items

11. No asset or liability can be double counted in the calculation of the NSFR or CFR.
    To avoid double-counting, the reporting institution should adopt the following reporting approach unless otherwise specified:
     if a liability can be covered by more than one ASF or ACF item, report that liability under the item that is subject to a lower ASF or ACF factor; and  if an asset or off-balance sheet obligation can be covered by more than one RSF or RCF item, report that asset or obligation under the item that is subject to a higher RSF or RCF factor. SPECIFIC INSTRUCTIONS
    PART 1: SUMMARY CERTIFICATE
12. Category 1 institutions and category 2A institutions must complete Section (I) and
    Section (II) of this Part respectively.
    (I) Reporting of NSFR shortfall by category 1 institutions
13. In this Section, a category 1 institution should report in item 1 whether
    self-rectification under rule 8B has become applicable during the quarter. If the answer is “yes”, complete sub-items 2(a) to (d). For sub-items 2(c) and (d), if self-rectification was still in force on the quarter-end reporting date, insert “N/A”. (II) Reporting of average CFR by category 2A institutions
14. In this Section, a category 2A institution should report item 1 “Average ACF” and
    item 2 “Average RCF” for each calendar month during the quarter. The two items

MA(BS)26 / P.6 (01/2020) should be calculated by dividing the sum of the weighted amounts of ACF, or the sum of the weighted amounts of RCF, as the case may be, maintained by the reporting institution at the close of business on each working day during the reporting calendar month, by the number of working days during that month. If the institution has been approved by the HKMA to calculate its average CFR on the basis of specified days during a calendar month, it should calculate the average ACF and RCF by dividing the sum of the weighted amounts of ACF, or the sum of the weighted amounts of RCF, as the case may be, maintained by the institution at the close of business on each of the specified days during the reporting month by the number of such specified days during that month. If any such specified day is a public holiday, the immediately preceding working day should be taken for the purposes of such calculation. Item 3 “Average CFR” will be generated automatically from that reported by the reporting institution in items 1 and 2.

MA(BS)26 / P.7 (01/2020)
PART 2: NET STABLE FUNDING RATIO
General requirements for NSFR
Interdependent assets and liabilities
15. A category 1 institution must not treat any pair of asset and liability as
“interdependent” unless –
(a) in the case of a note-issuing bank, it can recognise “certificates of indebtedness” held and “legal tender notes” issued as “interdependent”; (b) in other cases, that permission for treating such asset and liability as interdependent under rule 70(1) has been given by the HKMA. If the HKMA has given permission for treating a pair of asset and liability as interdependent, a category 1 institution can treat the weighted amounts of both the asset and liability in the pair as $0, and must report the aggregate value and other required information of the interdependent asset and liability in Annex 4. The HKMA will grant permission to treat any pair of asset and liability as interdependent only if the criteria set out in rule 70(2) are fully met. In making the decision, the HKMA will also consider whether perverse incentives and unintended consequences are being created. For example, the HKMA will not grant permission if it is of the view that the asset and liability pair is structured with the primary objective to circumvent the NSFR requirement, or if the asset and liability pair still poses considerable funding risk to the institution. As noted in NSFR FAQ 9, derivative assets and derivative liabilities do not qualify for the treatment of interdependent assets and liabilities. A category 1 institution should preliminarily discuss its case with the HKMA before submitting any formal application for permission to treat any pair of asset and liability as interdependent. If the HKMA considers that there may be a case for treating the asset and liability pair as interdependent, the institution will be asked to submit a formal application for permission, supported by a comprehensive assessment conducted independently by its compliance department to demonstrate that the criteria set out in rule 70(2) are satisfied fully on a contractual basis.

MA(BS)26 / P.8 (01/2020)
Securities financing transactions
16. Securities financing transactions should be treated as follows (Ref: NSFR standard 32
and NSFR FAQ 5.1):
(a) NSFR treatment of collateral received in a secured lending (e.g. reverse repo and securities borrowing) transaction is determined by the collateral’s balance sheet and accounting treatments, which should generally result in institutions excluding, from their assets, securities which they have received or borrowed in secured lending transactions where they do not have beneficial ownership and keep off-balance sheet. In this case, there is no NSFR treatment for the collateral. If, however, the collateral received is kept on-balance sheet, such collateral should receive an RSF factor according to its characteristics (the asset type, its term, issuers etc.) (b) Institutions should include in their assets securities they have posted or lent in secured funding (e.g. repo and securities lending) transactions where they retain beneficial ownership. Where institutions have encumbered securities in secured funding transactions, but have retained beneficial ownership and those assets remain on the institution’s balance sheet, the institution should apply the appropriate RSF factor to the encumbered securities. (c) In a secured lending transaction where the collateral received does not appear on the institution’s balance sheet, and it has been re-hypothecated or sold outright, since the liquidation of the on-balance sheet cash receivable related to the original secured lending transaction is contingent on the return of collateral that is no longer held by the institution, the receivable should be considered as encumbered and reported in Annex 3:

• If the collateral received has been re-hypothecated, the receivable related
  to the original secured lending transaction should be considered encumbered for the term of the re-hypothecation of the collateral.
• If the collateral received has been sold outright, thereby creating a short
  position, the receivable related to the original secured lending transaction should be considered encumbered for the term of the residual maturity of the secured lending transaction. (d) In a secured lending transactions where the collateral received appears on the institution’s balance sheet:

MA(BS)26 / P.9 (01/2020)

• If the collateral has been re-hypothecated, the collateral should be treated
  as encumbered for the term of the re-hypothecation of the collateral.
• If the collateral has been sold outright, thereby creating a short position,
  but the cash receivable under the original secured lending transaction remains on the institution’s balance sheet under the applicable accounting standards, the receivable should be considered encumbered for the term of the residual maturity of the secured lending transaction.

17. If the reporting institution has entered into more than one securities financing
    transaction (e.g. repo or reverse repo transaction) with a counterparty that are covered by a bilateral netting agreement that meets the conditions specified in the second bullet in paragraph 10.3(b)(ii) of the Completion Instructions for the Return of Leverage Ratio (MA(BS)27), 7 the funding provided and received by the institution arising from those securities financing transactions may be reported on a net basis (Ref: NSFR FAQ 5).
18. If an asset (e.g. loan) is partially secured by “recognized collateral”8
    and is eligible to be separated into two portions for receiving different levels of risk-weights 9 pursuant

7
The required conditions are –

• the relevant securities financing transactions have the same explicit final settlement date; in particular,
  transactions with no explicit end date but which can be unwound at any time by either party to the transaction are not eligible for netting;
• the right to set off the amount owed to the counterparty with the amount owed by the counterparty is
  legally enforceable both currently in the normal course of business and in the event of the counterparty’s (i) default; (ii) insolvency or (iii) bankruptcy; and
• the counterparties intend to settle net, settle simultaneously, or the transactions are subject to a
  settlement mechanism that results in the functional equivalent of net settlement, that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date. To achieve such equivalence, both transactions are settled through the same settlement system and the settlement arrangements are supported by cash and/or intra-day credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and any issues arising from the securities legs of the securities financing transactions do not interfere with the completion of the net settlement of the cash receivables and payables. In particular, this latter condition means that the failure of any single securities transaction in the settlement mechanism may delay settlement of only the matching cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility. If there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross. It should be noted that the above conditions are not the same as those governing the netting of derivative transactions under a “valid bilateral netting agreement”. 8 Please refer to section 77 of the BCR for the meaning of “recognized collateral”. 9 For NSFR purposes, if a reference is made to the “risk-weight” of an asset, the risk-weight must be determined by the reporting institution according to the standardized (credit risk) approach provided in the

MA(BS)26 / P.10 (01/2020) to Part 4 of the Banking (Capital) Rules (BCR), the asset can also be separated into two portions to receive different levels of RSF factors for NSFR purposes. If the asset will mature by instalments, it can be separated into two portions as if the portion containing instalments maturing later were secured fully while the other portion containing instalments maturing sooner should be treated as if this portion were unsecured. This treatment is subject to the condition that the collateral is contractually pledged to the reporting institution throughout the remaining term to maturity of the asset (Ref: Basel QIS FAQ 40 10). If the asset cannot be treated separately under the BCR (e.g. the relevant criteria are not met fully), apply the higher RSF factor to the whole asset. (Ref: NSFR FAQ 6) Specific requirements for NSFR
Section (I): Available Stable Funding (ASF)
Item 1. Capital
19. If the reporting institution is incorporated in Hong Kong (hence subject to the
HKMA’s capital adequacy requirements), follow the instructions below. Otherwise, report “0” in this item. 11 (a) Tier 1 capital (before regulatory adjustments)
20. Report the book value of Tier 1 capital (before regulatory adjustments), which covers
CET1 capital (before regulatory adjustments) and Additional Tier 1 capital (before regulatory adjustments).

BCR, irrespective of whether the institution is actually using this approach to calculate its credit risk exposures for regulatory capital purposes. (Ref: NSFR FAQ 28) 10 http://www.bis.org/bcbs/qis/biiiimplmonifaq_sep17.pdf 11 To calculate the NSFR (or CFR) on the Hong Kong office basis and unconsolidated basis, the reporting institution should report sub-item (a) Tier 1 capital (before regulatory adjustments) and sub-item (b) Tier 2 capital (before regulatory adjustments) on the solo basis (or solo-consolidated basis where applicable) as defined in section 2(1) of the BCR. For the calculation of the NSFR (or CFR) on a consolidated basis that may not be the same as the consolidated basis for the regulatory capital purposes, the reporting institution should report these two sub-items according to the consolidated basis for the regulatory capital purposes. Any capital arising from an associated entity that is not consolidated for regulatory capital purposes should not be reported under sub-item (a) or (b). Such capital should be reported under sub-item (d).

MA(BS)26 / P.11 (01/2020)
(b) Tier 2 capital (before regulatory adjustments)
21. Report the book value of Tier 2 capital (before regulatory adjustments) under
appropriate columns according to the remaining terms to maturity. To avoid doubt,  collective provisions 12 and Tier 2 capital instruments without specified terms to maturity should be reported under the column of “No specified term to maturity”. For the collective provisions, report the total amount set aside by the institution in its financial accounts. Disregard the limit of 1.25% under the STC Approach or 0.6% under the IRB Approach specified in section 42 of the BCR;  regulatory reserves should not be included in the reporting of Tier 2 capital (before regulatory adjustments), as such reserves are not deducted in the calculation of Tier 1 Capital (before regulatory adjustments); and  capital instruments that will be phased out for regulatory capital purposes after completion of the transitional arrangements as referred to in section 5 of
Schedule 4H to the BCR should not be included in sub-item (a) or (b) above
(Ref: NSFR standard footnote 8). However, these capital instruments may be reported under sub-item (c) or (d) where appropriate. (c) minority interests not covered by sub-item (a) or (b)
22. Report the book value of minority interests not covered by sub-item (a) or (b). If
there is any minority interest that has a specified term to maturity, report it under the relevant column. Otherwise, report under the column of “No specified term to maturity”. (Ref: NSFR standard paragraph 25(b)) (d) capital instruments not covered by sub-item (a), (b) or (c)
23. Report the book value of any other capital instruments not covered by sub-item (a),
(b) or (c). For example, capital instruments not meeting the criteria set out in Schedules 4A, 4B and 4C (hence not qualified for recognition as CET1 capital, Additional Tier 1 capital or Tier 2 capital) should be reported under this sub-item according to the instruments’ remaining terms to maturity.

12 In line with the capital treatment, the provisions made by the reporting institution at “Stage 1” and “Stage 2” under HKFRS9 are regarded as “collective provisions”. For NSFR and CFR purposes, these provisions are included in the calculation of “Tier 2 capital instruments (before regulatory adjustments)” by a locally incorporated institution. In the case of an overseas-incorporated institution’s Hong Kong branch, please refer to paragraph 37.

MA(BS)26 / P.12 (01/2020)
Item 2. Debt securities or prescribed instruments issued by the institution
24. Report the book value of outstanding debt securities and prescribed instruments issued
by the reporting institution according to their remaining terms to maturity. To avoid doubt, debt securities and prescribed instruments issued and held by the institution (or the institution’s overseas branch or specified associated entities included in the calculation of NSFR on an unconsolidated or consolidated basis) should be reported under item 11 (if not derecognised under the applicable accounting standard). Item 3. Retail deposits
25. Report the book value of stable retail deposits under sub-item (a). Such deposits
may include both demand deposits and term deposits that fall within the definition of “stable retail deposits” under rule 39 13 (Ref: NSFR FAQ 22). Other retail deposits (including demand deposits and term deposits taken from retail customers but not recognised as “stable”) should be reported under sub-item (b).
26. For completing this item, deposits withdrawable on demand (hence without a
specified term to maturity) should be reported under the column of “< 6 months or repayable on demand”. Term deposits should be reported according to the contractual remaining terms to maturity. If, however, a term deposit may be withdrawn before the maturity date without entailing a withdrawal penalty significantly greater than the loss of interest accrued on the deposits 14, that deposit should be reported under the column of “<6 months or repayable on demand”.
27. For compliance with rule 64, if a category 1 institution incorporated in Hong Kong
has any overseas branch or overseas-incorporated associated entity that takes retail deposits in a host country and the requirements applicable to the relevant deposits under the host country’s NSFR framework are different from (but not less stringent than) the requirements set out in the BLR, the institution should, for the calculation of its NSFR on the unconsolidated basis or consolidated basis covering the branch or entity, apply the host country’s requirements to account for the relevant deposits. For example, whether the relevant deposits should be classified as “stable retail deposit” (hence covered by item 3(a) instead of item 3(b)) would be determined

13 The definition of “stable retail deposit” provided in rule 39 has been amended such that term deposits taken from retail customers having a remaining term beyond 30 days may also be recognised as “stable retail deposits” under both the NSFR and LCR, provided that the other criteria for this class of deposits are met fully. 14 See the HKMA’s guidance provided in paragraphs 5.8.12 to 5.8.14 of Supervisory Policy Manual (SPM) module LM-1.

MA(BS)26 / P.13 (01/2020) according to the host country’s classification criteria. For example, if the institution has the following retail deposit positions and the retail deposits taken by its overseas operation are subject to a set of ASF factors that is more stringent than that prescribed in the BLR, the institution should complete item 3 in the following way:
Retail deposits taken by HK office (classified according to BLR) < 6 months or repayable on demand 6 months to <12 months 12 months or more No specified term to maturity ASF factor under BLR Weighted amount (a) stable retail deposits 1,000 900 800 90% 95% 100% 2555 (b) retail deposits not covered by sub-item (a) 2,000 1800 1600 90% 90% 100% 5110 Retail deposits taken by overseas operation (classified according to host country’s requirements) < 6 months or repayable on demand 6 months to <12 months 12 months or more No specified term to maturity ASF factor in host country Weighted amount (a) stable retail deposits 500 400 300 80% 90% 100% 1060 (b) retail deposits not covered by sub-item (a) 250 200 150 70% 80% 100% 485
3. Retail deposits < 6 months or
repayable on demand
6 months to
<12 months
12 months or more
No specified term to maturity
ASF factor (insert N/A for each cell)
Weighted amount
(a) stable retail deposits 1,500 1,300 1,100 N/A 3,615 (b) retail deposits not covered by sub-item (a) 2,250 2,000 1,750 N/A 5,595 Item 4. Small business funding
28. Complete this item in a manner similar to item 3.
Item 5. Operational deposits
29. Report the book value of operational deposits taken by the reporting institution. An
operational deposit without a specified term to maturity should be reported under the column of “<6 months or repayable on demand”. If an operational deposit has a specified term to maturity, report that deposit under the appropriate column. Item 6. Funding (other than operational deposits) provided to the institution
30. Report the book value of funding (other than operational deposits) provided to the
institution by the specified types of counterparties.
31. Report under sub-item (a) funding provided by corporates (other than small business
customers), sovereigns, multilateral development banks, national development banks 15 and public sector entities.

15 Pursuant to rule 59(1), “national development bank” (NDB) means an entity specified in Schedule 7 of BLR or specified by the relevant banking supervisory authority of a place outside Hong Kong. While the HKMA has not yet specified any entity as an NDB in Schedule 7, we will keep under review the need to

MA(BS)26 / P.14 (01/2020)
32. Report under sub-item (b) funding provided to the institution by the HKMA or central
banks.
33. Funding provided by financial institutions and other entities not covered by sub-item
(a) or (b) should be reported under sub-item (c). According to NSFR FAQ 2, “financial institutions” for the application of the NSFR standard include banks, securities firms, insurance companies, fiduciaries (defined in this context as a legal entity that is authorised to manage assets on behalf of a third party, including asset management entities such as pension funds and other collective investment vehicles) and beneficiaries (defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract). Item 7. Funding provided to the institution not covered by items 1 to 6
34. Report the book value of funding provided to the reporting institution but not covered
by items 1 to 6, if any.
35. In the case of an overseas-incorporated institution, the earnings of its Hong Kong
branch should also be covered by this item. Report the earnings according to the earliest possible date on which such earnings may cease to be retained at the branch. For example, earnings retained at the branch for a specified period should be reported under the appropriate column. If the earnings may be transferred out of the branch (e.g. to its head office) on demand, report the earnings under the column of “< 6 months or repayable on demand”. If the transfer is subject to a specified period of advance notice, report the earnings according to the specified period of advance notice. If the earliest possible date of transfer cannot be determined practically (e.g. the transfer is subject to an advance notice period but the notice period has not been specified), report the earnings under the column of “no specified term to maturity”.
36. If a foreign bank branch is incurring a loss, follow the above instruction to report the
loss, which should be presented with a negative figure.
37. Collective provisions set aside by an overseas-incorporated institution’s Hong Kong
branch can also be reported under this item (under the time bucket of “12 months or more”).

make such specifications. For reporting funding received from overseas NDBs, category 1 institutions should verify if their funding counterparties have been specified as NDBs by the relevant overseas banking supervisory authorities for NSFR calculation purposes.

MA(BS)26 / P.15 (01/2020)
Item 8. Deferred tax liabilities
38. For a deferred tax liability that has no specified term to maturity, report the item
according to rule 65(4) as follows:
 if the earliest possible realisation of the liability is in less than 6 months, the liability is to be treated as having a remaining term to maturity of less than 6 months or being repayable on demand;  if the earliest possible realisation of the liability is in less than 12 months but not less than 6 months, the liability is to be treated as having a remaining term to maturity of 6 months to less than 12 months; or  if the earliest possible realisation of the liability is in not less than 12 months, the liability is to be treated as having a remaining term to maturity of 12 months or more.
39. If the institution cannot determine the earliest possible realisation date of a deferred
tax liability, report the liability under the column of “< 6 months or repayable on demand”. Item 9. Net derivative liabilities
40. Complete Annex 1, which will generate a figure for this item.
Item 10. Trade-date payables
41. Report the book value of trade-date payables according to the definition of such
payables provided in rule 54(1).
Item 11. Liabilities not covered by items 1 to 10
42. Report the value of other on-balance sheet liabilities not covered by items 1 to 10.
For example, operating expenses payable by the institution should be covered by this item.

MA(BS)26 / P.16 (01/2020)
Section (II): Required Stable Funding (RSF)
(A) Unencumbered assets, off-balance sheet obligations and total derivative liabilities (before adjustments)
43. The assets covered by items 1 to 11 of this Section should be free from encumbrance
unless otherwise specified (see items 2 and 8). An asset is not free from encumbrance if the asset is pledged by the institution, either explicitly or implicitly, to secure, collateralise or provide credit enhancement to a transaction, or the asset is designated by the institution to cover specific expenses. Item 1. Currency notes and coins
44. Report the book value of currency notes and coins held by the institution. Such
notes and coins should be immediately available to meet the institution’s obligations. Item 2. Claims on the Monetary Authority for the account of the Exchange Fund or central banks
45. Report under sub-item (a) the book value of the reporting institution’s fund
maintained at the HKD CHATS Account. This sub-item also covers the institution’s reserves placed at a central bank (including the portion for meeting the central bank’s reserve requirement and any excess portion).
46. Report under sub-item (b) all other claims on the HKMA or central banks not covered
by sub-item (a), having a remaining term to maturity of less than 6 months or being repayable on demand (Ref: NSFR FAQ 19). For example, such claims may arise from short-term money market transactions or securities financing transactions conducted by the institution with the HKMA or central banks, or the institution’s holding of marketable debt securities issued by the HKMA or central banks where such securities have remaining terms to maturity of less than 6 months. Other debt securities issued by the HKMA or central banks with a maturity period of 6 months or more should be reported under item 3. (Ref: NSFR FAQ 1)
47. To avoid doubt, RMB funds placed at the institution’s RMB Fiduciary Account can
be reported under sub-item (b) if the funds are withdrawable on demand or within a period of less than 6 months.
48. Report under sub-item (c) the book value of loans (if any) provided to the HKMA or
central banks, having a remaining term to maturity of 6 months or more, or having no specified term to maturity (other than those repayable on demand that are covered by sub-item (a)). If a loan covered by this sub-item is subject to a risk-weight of 20% or

MA(BS)26 / P.17 (01/2020) less under section 55(2) of the BCR, report it under sub-item (c)(i). Otherwise, report under sub-item (c)(ii). Item 3. Securities held by the institution (other than securities representing the institution’s claims covered by item 2(b))
49. Report under sub-items (a) to (c) the fair value of securities falling within the classes
of level 1 assets, level 2A assets and level 2B assets specified in Part 2 of Schedule 2 to the BLR.
50. Report under sub-item (d) any debt securities not covered by sub-item (a), (b) or (c).
Debt securities or prescribed instruments that are not marketable should be covered by this sub-item.
51. Report under sub-item (e) the fair value of listed equities not covered by sub-item (c)
held by the institution. To avoid doubt, listed derivative products (such as exchange-traded futures, options and warrants) should not be covered by this item, but by Annex 1.
52. The reporting of securities long and short positions under item 3 should depend on the
applicable accounting standards. For example, if an institution is required under the accounting standards to recognise its securities long position as its on-balance sheet asset on a gross basis, it should also report its securities holding position on a gross basis under this item. Securities holding position should not be reported on a net long basis under this item, unless this is allowed under the applicable accounting standards. Item 4. Physical traded commodities held by the institution
53. Report the fair value of physical traded commodities (e.g. gold) held by the reporting
institution. Commodity-related derivative contracts should not be covered by this item, but by Annex 1. Item 5. Operational deposits placed by the institution at other financial institutions
54. Report the book value of operational deposits placed by the reporting institution at
other financial institutions. If an operational deposit covered by this item is repayable on demand or has a specified term to maturity, report it under the appropriate column. Otherwise, report it under the column of “No specified term to maturity”.

MA(BS)26 / P.18 (01/2020)
Item 6. Loans and funds (other than operational deposits) provided by the institution to other financial institutions
55. Report the book value of loans and funds (other than the operational deposits covered
by item 5) provided by the reporting institution to other financial institutions. For example, such loans and funds include the reporting institution’s placements at, and other secured or unsecured funding granted to, financial institutions. Sub-item (a) covers loans and funds secured by level 1 assets that can be re-hypothecated by the reporting institution for the life of the loan. Other loans and funds are covered by sub-item (b).
56. If the loans and funds covered by this item are repayable on demand (e.g. nostro
balances that are repayable to the institution on demand) or have a specified term to maturity, report them under the appropriate column. Otherwise, report them under the column of “No specified term to maturity”. Item 7. Loans and funds provided by the institution to retail customers and wholesale customers (other than the Monetary Authority for the account of the Exchange Fund, central banks and financial institutions)
57. This item covers all loans and funds provided by the institution to retail customers,
and wholesale customers (e.g. small business customers, corporates, sovereigns, multilateral development banks, national development banks and public sector entities) other than the Monetary Authority, central banks and financial institutions. Report under sub-item (a) the book value of loans and funds which are subject to a risk-weight of 35% or less under Division 3 of Part 4 of the BCR. Otherwise, report the loans and funds under sub-item (b).
58. Report the loans and funds under the appropriate columns according to their
remaining terms to maturity. Loans without a stated maturity (such as overdraft and credit card balances except the periodic repayment portion that is addressed separately in paragraph 59) granted by the reporting institution should be reported under the column of “no specified term to maturity” (Ref: NSFR FAQ 18). If a loan is drawn under a facility and there is a contractual provision that the loan or facility is subject to periodic review to determine whether it is renewed or not, the institution may regard the next review date as the loan’s maturity date. In doing so, the institution should consider the actual likelihood of terminating the loan or facility (e.g. the institution has decided not to renew the facility). In particular, options by an institution not to renew a facility should generally be assumed not to be exercised when there may be reputational concerns. (Ref: NSFR FAQ 21)

MA(BS)26 / P.19 (01/2020)
59. To avoid doubt, loans drawn under revolving facilities but repayable according to
predefined schedules (whether by instalments or by one single bullet) can be reported according to the schedules. Such loans include, for example, the monthly minimum repayment portions of credit card balances, fixed-term trade-financing loans, and any other fixed term personal or corporate loans drawn under revolving facilities. Item 8. Assets posted by the institution as initial margins or default fund contributions
60. Report the book value of assets (whether in the form of cash or other types of asset)
posted by the reporting institution to counterparties as initial margins (IM) or default fund contributions (DFC) under all derivative contracts regardless of whether the assets are maintained on the institution’s balance sheet (Ref: NSFR FAQ 15).
61. If an asset posted by the institution as IM or DFC falls within a type of assets that
would have been subject to an RSF factor of 100% had it not been posted by the institution, report that asset under sub-item (a). Otherwise, report under sub-item (b).
62. Exclude those IM or DFC posted on behalf of the institution’s customers if the
institution does not provide guarantee to its customer on its counterparty’s performance, meaning that the customer (but not the institution) is exposed to the risk of default of the counterparty. 16

63. If the IM or DFC posted by the reporting institution is not separable from variation
    margins (VM), follow the instructions below:
     for non-centrally cleared over-the-counter derivative contracts, any fixed independent amount an institution is contractually required to post at the inception of the derivative transaction should be considered as IM, regardless of whether any portion of this amount is returned to the institution in the form of VM. If the IM level is formulaically determined on a portfolio basis (i.e. based on the aggregate value of all derivative contracts between the reporting institution and its counterparty), the amount considered as IM should be determined according to the portfolio value at the time when the institution calculates its NSFR, notwithstanding that the amount of margin actually posted by the institution to its counterparty may be lower because of VM

16 For example, this may refer to a situation where the reporting institution provides a customer access to a third party (e.g. a central counterparty) for clearing derivative contracts, where the contracts are executed in the name of the customer and the institution does not guarantee the performance of the third party. (Ref:
NSFR FAQ 10)

MA(BS)26 / P.20 (01/2020) payments received.
 for centrally cleared derivative contracts, the IM reported under this item should reflect the total amount of margin posted (IM and VM) by the reporting institution less any mark-to-market losses on the applicable portfolio of cleared transactions. (Ref: NSFR FAQ 13) Item 9. Net derivative assets
64. Complete Annex 1, which will generate a figure for this item.
Item 10. Trade-date receivables
65. Report the book value of trade-date receivables according to the definition of such
receivables provided in rule 54(1).
Item 11. Assets not covered by items 1 to 10
66. Report under sub-item (a) the book value of fixed assets, investments in associated
entities and other unlisted equities, goodwill and other intangible assets, assets of any defined benefit pension fund or plan, investments in own capital instruments (if not derecognised under applicable accounting standards), insurance assets, retained interests, non-performing assets (net of specific provisions 17), and other assets that do not have specified terms to maturity.
67. Report under sub-item (b) the book value of other assets that are repayable on demand
or have specified terms to maturity.
Item 12. Off-balance sheet obligations
68. Complete Annex 2, which will generate a figure for this item.

17 The meaning of “specific provisions” provided in section 2(1) of the BCR is also applicable for NSFR and CFR purposes. In line with the capital treatment, such provisions are made by the reporting institution at “Stage 3” (or for purchased or originated credit-impaired financial assets at initial recognition) under the HKFRS 9.

MA(BS)26 / P.21 (01/2020)
Item 13. Total derivative liabilities (before adjustments) 68A. Complete this item in a manner similar to item 4 of Annex 1. For the purposes of calculating this item, derivatives structured as “settled-to-market” 18 should be included. The replacement cost of these derivatives should be calculated as if no settlement payments and receipts had been made to account for the changes in the value of the derivative transaction or a portfolio of derivative transactions. (B) Encumbered assets
69. Complete Annex 3, which will generate the total weighted amount of encumbered
assets for this item.

18 Derivative contracts are said to be “settled to market” when the variation margin on cleared derivatives is recorded as settlement payments rather than as transfer of collateral. This practice allows the banks to take ownership of the collateral they receive. Under these contracts, daily payments of mark-to-market variation margin are recorded as settlements of the derivatives transactions rather than transfers of collateral and the market value of the derivatives is reset daily to zero. [Explanatory note: the treatment of "settled-to-market" derivatives was originally set out in item 2 of the responses of the Basel Committee on Banking Supervision to FAQs issued on 20 September 2018.]

MA(BS)26 / P.22 (01/2020)
PART 3: CORE FUNDING RATIO
General requirements for reporting of CFR
Securities financing transactions
70. For the CFR, securities financing transactions should be treated as follows:
(a) CFR treatment of collateral received in a secured lending (e.g. reverse repo and securities borrowing) transaction is determined by the collateral’s balance sheet and accounting treatments, which should generally result in institutions excluding, from their assets, securities which they have received or borrowed in secured lending transactions where they do not have beneficial ownership and keep off-balance sheet. In this case, there is no CFR treatment for the collateral. If, however, the collateral received is kept on-balance sheet, such collateral should receive an RCF factor according to its characteristics (the asset type, its term, issuers etc.) (b) Institutions should apply the appropriate RCF factor to securities they have posted or lent in secured funding (e.g. repo and securities lending) transactions where they retain beneficial ownership and keep the securities on the institutions’ balance sheet.
71. If the asset received under a secured lending transaction is re-hypothecated or sold
outright under another secured funding transaction, treat the two transactions separately according to the instructions provided in paragraph 70.
72. If the reporting institution has entered into more than one securities financing
transaction (e.g. repo or reverse repo transaction) with a particular counterparty that are covered by a bilateral netting agreement that meets the conditions specified in the second bullet in paragraph 10.3(b)(ii) of the Completion Instructions for the Return of Leverage Ratio (MA(BS)27), the funding provided and received by the institution arising from those securities financing transactions may be reported on a net basis.
Section (I): Available Core Funding (ACF)
Item 1. Capital
73. To complete this item, follow the instructions provided for item 1 of Section (I) of
Part 2.

MA(BS)26 / P.23 (01/2020)
Item 2. Debt securities or prescribed instruments issued by the institution
74. Report the book value of outstanding debt securities and prescribed instruments issued
by the reporting institution according to their remaining terms to maturity. To avoid doubt, debt securities and prescribed instruments issued and held by the reporting institution (or the institution’s overseas branch or specified associated entities included in the calculation of NSFR on an unconsolidated or consolidated basis) should be reported under item 8 (if not derecognised under the applicable accounting standard) (receiving an ACF factor of 0%). Item 3. Deposits
75. Report the book value of deposits taken by the reporting institution from non-bank
customers. Deposits without a specified term to maturity should be reported under the column of “< 6 months or repayable on demand”. Term deposits should be reported according to their contractual remaining terms to maturity. Item 4. Funding provided to the institution not covered by item 1, 2 or 3
76. Report the book value of funding provided to the reporting institution but not covered
by item 1, 2 or 3. This item covers the secured or unsecured non-deposit funding provided to the institution by all type of counterparties.
77. Funding provided to the institution for a specified period should be reported under the
appropriate column according to its remaining terms to maturity. Perpetual funding provided to the institution (e.g. by its parent or head office) can be reported under the column of “12 months or more”. Otherwise, report any funding without specified terms to maturity according to the earliest possible day of repayment. If the funding is repayable on demand, report the funding under the column of “< 6 months or repayable on demand”. If the repayment is subject to a specified period of advance notice, report the funding according to the specified period of advance notice. If the earliest possible repayment date cannot be determined practically (e.g. the repayment is subject to an advance notice period but the notice period has not been specified), report the funding under the column of “no specified term to maturity”.
78. The earnings and collective provisions of an overseas-incorporated institution’s Hong
Kong branch should also be covered by this item. The relevant instructions provided in paragraphs 35 to 37 for item 7 of Section (I) for the NSFR are also applicable for reporting this item under the CFR.

MA(BS)26 / P.24 (01/2020)
Item 5. Deferred tax liabilities
79. For a deferred tax liability that has no specified term to maturity, report the item
according to rule 77(4) as follows:
 if the earliest possible realisation of the liability is in less than 6 months, the liability is to be treated as having a remaining term to maturity of less than 6 months or being repayable on demand;  if the earliest possible realisation of the liability is in less than 12 months but not less than 6 months, the liability is to be treated as having a remaining term to maturity of 6 months to less than 12 months; or  if the earliest possible realisation of the liability is in not less than 12 months, the liability is to be treated as having a remaining term to maturity of 12 months or more.
80. If the institution cannot determine the earliest possible realisation date of a deferred
tax liability, report the liability under the column of “< 6 months or repayable on demand”. Item 6. Net derivative liabilities
81. Complete Annex 1, which will generate a figure for this item.
Item 7. Trade-date payables
82. Report the book value of trade-date payables according to the definition of such
payables provided in rule 54(1).
Item 8. Liabilities not covered by items 1 to 7
83. Report the book value of other on-balance sheet liabilities not covered by items 1 to 7.
For example, operating expenses payable by the institution should be covered by this item.
Section (II): Required Core Funding (RCF)
Item 1. Currency notes and coins
84. Report the book value of currency notes and coins held by the institution.

MA(BS)26 / P.25 (01/2020)
Item 2. Gold bullion
85. Report the fair value of gold bullion held by the institution.
Item 3. Claims on, or reserves maintained with, the Monetary Authority for the account of the Exchange Fund or central banks
86. Report the book value of claims on, or reserves maintained with, the Monetary
Authority or central banks, irrespective of the remaining terms to maturity of such claims or reserves.
87. To avoid doubt, RMB funds placed at the institution’s RMB Fiduciary Account can
be reported under this item.
Item 4. Export bills
88. Report the book value of export bills according to their remaining terms to maturity.
Item 5. Securities or prescribed instruments held by the institution
89. Report under sub-item (a) the fair value of securities or prescribed instruments
mentioned in item 5(a) of Table 4 to Schedule 6 (which refers to item 6 of Table A of
Section 2 of Schedule 5) to the BLR. Report under sub-item (b) the fair value of listed
ordinary shares mentioned in item 5(ab) of Table 4 to Schedule 6 (which are the same as those referred to in item 6A of Table A of section 2 of Schedule 5) to the BLR. Other securities and instruments should be reported under sub-item (c) according to their remaining terms to maturity. Report perpetual securities or prescribed instruments under the column of “no specified term to maturity”. For example, listed equities not covered by sub-item (b) should be covered by sub-item (c) under this column.
90. The reporting of securities long and short positions under item 5 should depend on the
applicable accounting standards. For example, if an institution is required under the accounting standards to recognise its securities long position as its on-balance sheet asset on a gross basis, it should also report its securities holding position on a gross basis under this item. Securities holding position should not be reported on a net long basis under this item, unless this is allowed under the applicable accounting standards.

MA(BS)26 / P.26 (01/2020)
Item 6. Loans and funds provided by the institution to banks
91. Report the book value of loans and funds provided by the reporting institution to
banks according to the remaining terms to maturity of the loans and funds. Loans and funds repayable on demand should be covered by the column of “< 6 months or repayable on demand”. For example, nostro balances placed at other banks that are repayable on demand should be covered by this column (unless there are any embedded options that may change the maturity profile of the loans and funds – see general instructions provided in paragraph 10).
92. In the cases of loans and funds provided by the institution to a bank with no specified
term to maturity but not repayable to the institution on demand (e.g. intragroup loans and funds provided to affiliate banks), reported the loans and funds under the column of “no specified term to maturity”. Item 7. Loans and funds provided by the institution to customers (other than the Monetary Authority for the account of the Exchange Fund, central banks and banks)
93. Report under sub-item (a) the book value of residential mortgage loans mentioned in
item 7 of Table A in section 2 of Schedule 5 to the BLR. Other loans and funds provided by the reporting institution to non-bank and non-central-bank customers should be reported under sub-item (b) according to their remaining terms to maturity.
94. To report non-maturity loans under this item, follow the instruction provided in
paragraphs 58 and 59.
Item 8. Net derivative assets
95. Complete Annex 1, which will generate a figure for this item.
Item 9. Trade-date receivables
96. Report the book value of trade-date receivables according to the definition of such
receivables provided in rule 54(1).
Item 10. Assets not covered by items 1 to 9
97. Report under sub-item (a) the book value of fixed assets, investments in associated
entities and other unlisted equities, goodwill and other intangible assets, assets of any defined benefit pension fund or plan, investments in own capital instruments (if not derecognised under applicable accounting standards), insurance assets, retained

MA(BS)26 / P.27 (01/2020) interests, non-performing assets (net of specific provisions), and other assets that do not have specified terms to maturity.
98. Report under sub-item (b) the book value of other assets that are repayable on demand
or have specified terms to maturity.
Item 11. Off-balance sheet obligations
99. Complete Annex 2, which will generate a figure for this item.
Item 12. Total derivative liabilities (before adjustments)
100. Complete this item in a manner similar to item 4 of Annex 1. For the purposes of
calculating this item, derivatives structured as “settled-to-market” 19 should be included. The replacement cost of these derivatives should be calculated as if no settlement payments and receipts had been made to account for the changes in the value of the derivative transaction or a portfolio of derivative transactions.

19 See Footnote 18

MA(BS)26 / P.28 (01/2020)
Annex 1
Derivative assets, liabilities and margins

1. Annex 1 covers all derivative contracts, whether traded over-the-counter or with a
   central counterparty. Each reporting institution must complete this Annex, which will generate the required figures to complete item 9 of section (I) and item 9 of
   section (II) of Part 2 (in case of a category 1 institution), or item 6 of section (I) and
   item 8 of section (II) of Part 3 (in case of a category 2A institution). Item 1. Total derivative assets
2. Report the sum of the replacement costs of derivative contracts between the reporting
   institution and its counterparties, where each of those contracts has a positive replacement cost.
3. If the institution has entered into 2 or more derivative contracts with a particular
   counterparty that are subject to a valid bilateral netting agreement, the institution must determine the aggregate net value of those contracts according to rule 58. If the aggregate net value of these contracts is positive, include that value in reporting under item 1. (Otherwise, report that value in absolute term under item 4.) Item 2. Cash variation margin received by the institution under the derivative contracts covered by item 1
4. Report the book value of variation margin (VM) received in the form of cash by the
   reporting institution under the derivative contracts covered by item 1, provided that the conditions set out in Paragraph 10.2(f) for the Completion Instructions to the Return of Leverage Ratio (MA(BS)27) are satisfied. 20

20 These conditions are:
(i) For trades not cleared through a qualifying central counterparty, the cash received by the recipient counterparty is not segregated (i.e. if the recipient counterparty has no restrictions by law, regulation or any agreement with the counterparty on the ability to use the cash received. In other words, the cash variation margin received is used as its own cash); (ii) the cash variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivative positions. To meet this criterion, derivative positions must be valued daily and cash variation margin must be transferred daily to the counterparty or the counterparty’s account, as appropriate. Cash variation margin exchanged on the morning of the subsequent trading day based on the previous, end-of-day market values would meet this criterion; (iii) the cash variation margin is held in any currency of settlement specified in the derivative contract, governing qualifying bilateral netting agreement, or the credit support annex to the bilateral netting agreement with a central counterparty; (iv) variation margin exchanged is the full amount that would be necessary to extinguish the

MA(BS)26 / P.29 (01/2020)
5. In the memorandum item 2A, report, if any, the book value of non-cash VM received
by the institution where this portion of VM is not covered by item 2. This item will facilitate the HKMA’s future policy study.
6. To avoid doubt, if any amount of the cash VM received by the institution covered by
item 2 is recognised as the institution’s on-balance sheet liability under the applicable accounting standards, that amount should not be reported under any ASF (or ACF) item in order to avoid double-counting. If there is any VM received by the institution (and recognised as on-balance sheet liability) but not covered by item 2 (e.g. non-cash VM and excess cash VM received), report such VM under item 11 of
section (I) of Part 2 (for the NSFR) or item 8 of section (I) of Part 3 (for the CFR).
Item 4. Total derivative liabilities
7. Report the sum of the replacement costs of derivative contracts between the reporting
institution and its counterparties, where each of those contracts has a negative replacement cost before adjustment for any variation margin posted by the institution to the counterparty under the contract. If the institution has entered into 2 or more derivative contracts with a particular counterparty that are subject to a valid bilateral netting agreement, the institution must determine the aggregate net value of those contracts according to rule 58. If the aggregate net value of these contracts is negative, include the absolute value under item 4. Item 5. Variation margin posted by the institution under the derivative contracts covered by item 4
8. Report the amount of VM (whether in form of cash or any other type of asset) posted
by the reporting institution under the derivative contracts covered by item 4.

mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty; and (v) derivative transactions and the variation margins are covered by a single bilateral netting agreement between the legal entities that are the counterparties in the derivative transaction. The bilateral netting agreement must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided, if a credit event occurs as to either counterparty. The bilateral netting agreement must be legally enforceable and effective (i.e. it meets the conditions set out in the BCR) in all relevant jurisdictions, including in the event of default and bankruptcy or insolvency. For the purposes of this paragraph, the term “bilateral netting agreement” includes any netting agreement that provides legally enforceable rights of offset and a master bilateral netting agreement may be deemed to be a single bilateral netting agreement.

MA(BS)26 / P.30 (01/2020)
9. To avoid doubt, if any amount of VM posted by the institution covered by item 4 is
recognised as the institution’s on-balance sheet asset under the applicable accounting standards, that amount should not be reported under any RSF (or RCF) item in order to avoid double-counting. (Ref: NSFR standard footnote 7) Numerical Example
10. Assuming that an institution has entered into a valid bilateral netting agreement with a
particular counterparty “C” and the institution has the following derivative positions arising from the derivative transactions with C:
Outstanding value
(a) Derivative assets arising from transactions with C 1,000 (b) Derivative liabilities arising from transactions with C (5,000) (c) Variation margins posted by the institution to C 800 (d) Cash variation margins received by the institution from C 100 (e) Aggregate net value of all derivative contracts with C (Negative sign represents the liability nature of the calculation result.) 1,000-5,000+800-100 = (3,300) These contracts with C should be singled out to calculate the aggregate net value. The calculation result is -3,300, meaning that the institution has net derivative liabilities of 3,300 arising from the derivative contracts with C.
11. Separately, the institution has the following derivative positions arising from the
derivative transactions with other counterparties which are not subject to a valid bilateral netting agreement:
Outstanding value
(f) Derivative assets arising from transactions with other counterparties 20,000 (g) Derivative liabilities arising from transactions with other counterparties (30,000) (h) Variation margins posted by the institution to other counterparties 7,000 (i) Cash variation margins received by the institution from other counterparties 4,000 (j) Non-cash variation margins received by the institution from other counterparties 1,500
12. In Annex 1, the institution should report –
Item 1 = (f) = 20,000
Item 2 = (i) = 4,000

MA(BS)26 / P.31 (01/2020)
Item 2A = (j) = 1,500
Item 3 (auto) = Item 1 – Item 2 = 16,000
Item 4 = Absolute value [(e) 21 + (g)] = 33,300 Item 5 = (h) = 7,000 Item 6 (auto) = Item 4 – Item 5 = 26,300 Item 7 (auto) = 0 (In this example, the institution does not have net derivative assets.) Item 8 (auto) = Absolute value [Item 3 – Item 6] = 10,300

21
In this example, since the aggregate net value of all derivative contracts with C is a negative value, it is included in item 4. If the aggregate net value is a positive value, it must be included in item 1 instead.

MA(BS)26 / P.32 (01/2020)
Annex 2
Off-balance sheet obligations

1. Each reporting institution must complete Annex 2, which will generate the required
   figures to complete item 12 of section (II) of Part 2 (for the NSFR) or item 11 of
   section (II) of Part 3 (for the CFR).
   Item 1. Potential drawdown of undrawn committed facilities
2. Report under item 1 the amount of undrawn committed facilities which are not
   unconditionally revocable as assessed reasonably by the reporting institution. 22

Item 2. Potential drawdown of uncommitted facilities
3. Report under item 2 the amount of undrawn uncommitted facilities which are
unconditionally revocable as assessed reasonably by the reporting institution. Item 3. Trade-related contingencies
4. Report under item 3 the contracted amount of trade-related contingencies that are
related to import or export trade transactions conducted by the reporting institution’s customers. To avoid doubt, this item does not capture undrawn commitments under trade financing facilities, which should be reported under item 1 or 2. Item 4. Guarantees and letters of credit unrelated to trade-related contingencies
5. Report under item 4 the contracted amount of guarantees and letters of credit issued
by the reporting institution, other than those covered by item 3.

22 For the assessment of “revocability” of a credit facility or liquidity facility, please refer to the guidance provided in paragraph 5.8.22 of SPM module LM-1.

MA(BS)26 / P.33 (01/2020)
Annex 3
Encumbered assets

1. Annex 3 should be completed by category 1 institutions for NSFR purposes. If the
   reporting institution has assets that are not free from encumbrances, report the assets in this Annex taking into account their remaining terms to maturity and periods of encumbrance, which will generate the total weighted amount of “encumbered assets” for item (B) of section (II) of Part 2.
2. To avoid double, this Annex does not cover those assets posted by the reporting
   institution as IM or DFC under derivative contracts, which have been covered by item 8 of Section (II) of Part 2; (Ref: NSFR FAQ 16)
3. For the completion of this Annex,
    if an asset of the reporting institution is segregated in a margin trading account to satisfy statutory requirements for the protection of customer interests, the asset should be treated as “encumbered”. In determining the asset’s encumbrance period, the institution should take into account the contractual term of the transaction that generates the segregation requirement, and whether and when the asset can be re-hypothecated by the institution. If the transaction does not have a specified term to maturity and the institution cannot determine the early possible time of the asset’s re-hypothecation, report that asset under the encumbrance period of “12 months or more”; (Ref: NSFR FAQ 23)  if an asset is collateralised by the reporting institution in a secured funding transaction (e.g. repo transaction) that has a remaining term to maturity longer than that of the collateral, the collateral should be considered “encumbered” throughout the transaction’s remaining term to maturity; 23 (Ref: NSFR FAQ 4)  if the reporting institution has used a common pool of assets to secure more than one funding transaction, the institution should, to the extent practicable, identify which asset in the pool is used to secure which specific transaction taking into account the relevant contractual specifications. If this is not practically feasible, the institution may adopt the following assumptions:

23 For example, if the institution has collateralised an issue of securities having a remaining term to maturity of 3 months to secure a funding transaction where the borrowed fund has a remaining term to maturity of 12 months, the institution should treat the collateralised securities as encumbered for a period of 12 months.

MA(BS)26 / P.34 (01/2020)

• the funding carrying the highest ASF factor would be secured first;
• the asset in the collateral pool carrying the highest RSF factor would be
  used to cover a funding first.

MA(BS)26 / P.35 (01/2020)
Annex 4
Interdependent assets and liabilities

1. This Annex must be completed by a category 1 institution that has been permitted by
   the HKMA to specify a pair of asset and liability as “interdependent” under rule 70(1). To avoid doubt, certificates of indebtedness held and legal tender notes issued by note-issuing banks do not need to be covered by this Annex.
2. A pair of interdependent asset and liability should be reported under the same item
   number in this Annex.
3. Provide the information specified in this Annex, including –
    the type of the interdependent asset and liability; 24  the value of the asset and liability; and  the date of the Monetary Authority’s permission given to the institution with respect to the specified pair of asset and liability.

24 For example, if the reporting institution has been permitted to treat a pair of asset and liability and as “interdependent”, where the asset and liability would have been covered by a specified RSF item and ASF item respectively, the institution should report the RSF item number under the column of “type of asset” in
Table 1 and the ASF item number under the column of “type of liability” in Table 2.