Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 22

Exemption from section 17

(1) The Monetary Authority may, by notice in writing given to an authorized
institution (other than an authorized institution which uses the IRB approach
to calculate its credit risk), exempt the institution from section 17 if the
institution demonstrates to the satisfaction of the Monetary Authority that—

   (a)  the institution's market risk positions—

        (i)    never exceed 5% of its total on-balance sheet and off-balance
               sheet exposures; or

        (ii)   only sporadically exceed 5%, and never exceed 6%, of its total
               on-balance sheet and off-balance sheet exposures; and

   (b)  the institution's market risk positions—

        (i)    never exceed $50 million; or

        (ii)   only sporadically exceed $50 million and never exceed $60
               million.

(2) For the purposes of subsection (1)—

   (a)  the amount of an authorized institution's market risk positions is
        calculated by aggregating—

        (i)    the institution's total gross (long plus short) positions in
               debt securities and debt-related derivative contracts;

        (ii)   the arithmetic mean of the institution's total long and total
               short positions in interest rate derivative contracts;

        (iii)  the institution's total gross (long plus short) positions in
               equities and equity-related derivative contracts;

        (iv)   the institution's total net open position in foreign exchange
               exposures as derived in section 296; and

        (v)    the institution's total gross (long plus short) positions in
               commodities and commodity-related derivative contracts; and

   (b)  an authorized institution's total on-balance sheet and off-balance
        sheet exposures are derived by—

        (i)    aggregating the institution's total liabilities, total assets
               less specific and collective provisions, and the principal
               amount (within the meaning of section 51) of all of the
               institution's off-balance sheet exposures; and

        (ii)   deducting therefrom the institution's paid-up capital, reserves
               (including current year's profit or loss) and perpetual or term
               subordinated debt.

(3) The date on which an authorized institution's market risk positions are
assessed for the purposes of subsection (1) shall be—

   (a)  subject to paragraph (b), the calendar quarter end date of each of the
        4 consecutive calendar quarters of the same calendar year; or

   (b)  the calendar quarter end date of such consecutive calendar  quarters,
        being not more than 4 consecutive calendar quarters, as the Monetary
        Authority specifies in writing given to the institution.

(4) Where an authorized institution is exempted under this section from
section 17, the institution—

   (a)  shall not, except with the prior consent of the Monetary Authority,
        include market risk in the calculation of its capital adequacy  ratio;

   (b)  shall give notice in writing to the Monetary Authority of—

        (i)    an increase in its market risk positions which causes, or could
               reasonably be construed as potentially causing, whether by
               itself or in conjunction with any other event, the institution
               to cease to fall within subsection (1)(a) or (b); or

        (ii)   an intention to increase its market risk positions which will
               cause, or could reasonably be construed as potentially causing,
               whether by itself or in conjunction with any other event, the
               institution to cease to fall within subsection (1)(a) or (b);

   (c)  shall apply Part 4, 5 or 7, as the case requires, to calculate the
        credit risk for the institution's market risk positions except for its
        total net open position in foreign exchange exposures as derived in
        section 296.

(5) In this section, the following expressions have the respective meanings
assigned to them by section 281—

   (a)  debt security; and

   (b)  equity.