Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 77

Recognized collateral

Division 5—Use of recognized collateral in credit risk mitigation: general

Collateral is recognized for the purposes of calculating the risk-weighted 
amount of an exposure of an authorized institution where—

   (a)  all documentation creating the collateral and providing for the
        obligations of the parties with respect to each other in respect of
        the collateral is binding on all parties and legally enforceable in
        all relevant jurisdictions;

   (b)  the legal mechanism by which the collateral is pledged or transferred
        ensures that the institution has the right to realize, or to take
        legal possession of, the collateral in a timely manner in the event of
        a default by, or the insolvency or bankruptcy of, or any other event
        specified in the relevant legal documentation applicable to any of—

        (i)    the obligor in respect of the exposure; or

        (ii)   the custodian, if any, holding the collateral;

   (c)  the institution has clear and adequate procedures for the timely
        realization of collateral in respect of an event referred to in
        paragraph (b);

   (d)  the institution has taken all steps to fulfil requirements under the
        law applicable to the institution's interest in the collateral which
        are necessary to obtain and maintain an enforceable security interest,
        whether by registration or otherwise, or to exercise a right to
        set-off in relation to title transfer collateral;

   (e)  if the collateral is to be held by a custodian, the institution has
        taken reasonable steps to ensure that the custodian segregates the
        collateral from the custodian's assets;

   (f)  there is no material positive correlation between the credit quality
        of the obligor in respect of which the institution has an exposure and
        the current market value of the collateral provided in respect of the
        exposure such that the current market value of the collateral would be
        likely to fall in the case of any material deterioration in the
        financial condition of the obligor;

   (g)  if the simple approach to the treatment of recognized  collateral
        applies to the collateral, the collateral—

        (i)    is pledged for not less than the life of the exposure;

        (ii)   subject to subparagraph (iii), is revalued not less than every
               6 months from the date upon which the collateral is taken in
               respect of the exposure; and

        (iii)  in the case of an exposure which is a past due exposure, is
               revalued not less than every 3 months from the date upon which
               the exposure is classified as a past due exposure;

   (h)  if the comprehensive approach to the treatment of recognized 
        collateral applies to the collateral, the institution has in place a
        written internal policy and systems and procedures—

   (i)  adequate to enable the institution to manage collateral provided to it
        in respect of any relevant exposure; and

        (ii)   to revalue the collateral as necessary and take account of the
               assumed minimum holding periods for collateral in the
               calculation of the risk-weighted amount of its exposures in
               respect of collateralized transactions; and

        (i)    the collateral falls within—

        (i)    section 79(a), (b), (c), (d), (e), (f), (g), (h), (i), (j),

   (k)  , (l), (m), (n), (o) or (p) if the institution uses the
        simple approach in its treatment of recognized collateral; or

        (ii)   section 80(a), (b), (c) or (d) if the institution uses the
               comprehensive approach in its treatment of
               recognized collateral.