Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 82

Determination of risk-weight to be allocated to recognized collateral under simple approach

(1) Where an authorized institution uses the simple approach in its treatment
of recognized collateral, the institution—

   (a)  subject to paragraph (b), shall determine the risk-weight to be
        allocated to the collateral in accordance with sections 55, 56, 57,
        58, 59, 60, 61, 62, 63, 66 and 68 as if the collateral were an
        on-balance sheet exposure; and

   (b)  subject to subsections (2), (3) and (4), shall not allocate a
        risk-weight of less than 20% to the collateral.

(2) Subject to subsection (3), an authorized institution may under subsection
(1) allocate a risk-weight of 0% to recognized collateral provided under a
repo-style transaction booked in the institution's banking book which falls
within paragraph (c) or (d) of the definition of

"repo-style transaction" in section 2(1) where—

   (a)  the counterparty is—

        (i)    a sovereign;

        (ii)   a public sector entity;

        (iii)  a multilateral development bank;

        (iv)   a bank or securities firm;

        (v)    a corporate (other than a bank or securities firm)— (A) which
               is an investment company, insurance firm, finance company or
               other like financial institution; and (B) which has an
               attributed risk-weight of not more than 20%; or

        (vi)   a clearing organization (other than a restricted clearing
               organization) the activities or objects of which include— (A)
               the provision of services for the clearing and settlement of
               transactions in, or the day-to-day adjustment of the financial
               position of, futures contracts or option contracts effected on
               an exchange; (B) the provision of services for the clearing and
               settlement of transactions in securities effected on an
               exchange; (C) the provision of services for the clearing and
               settlement of payment obligation; or (D) the provision of
               guarantees for the settlement of any transactions which fall
               within sub-subparagraph (A), (B) or (C);

   (b)  the exposure to which the collateral relates and the collateral are—

        (i)    cash; or

        (ii)   securities issued by a sovereign, or a sovereign foreign 
               public sector entity, which would be allocated a risk-weight of
               0% under the use of the STC approach;

   (c)  the exposure and the collateral have no currency mismatch;

   (d)  either—

        (i)    the exposure is only an overnight exposure; or

        (ii)   the exposure and the collateral are revalued daily by
               marking-to-market, and based on the marked-to-market value of
               the exposure and the collateral— (A) the value of any excess
               collateral (referred to in this
subsection as "margin") is calculated daily; and (B) if the margin is below
the value required under the terms of the transaction, the counterparty is
required to bring the margin up to the required value on the same day;

   (e)  the institution reasonably expects, if the counterparty fails to
        deliver any shortfall in margin required to be delivered to the
        institution under the terms of the transaction, to be able to realize
        the collateral for its benefit within 4 business days after the
        counterparty's failure to deliver the shortfall in margin;

   (f)  the transaction is settled by means of a settlement system customarily
        used for repo-style transactions;

   (g)  the transaction is documented using standard market documentation for
        the securities which are the subject matter of the transaction; and

   (h)  the documentation setting out the transaction provides that—

   (i)  the institution may terminate the transaction immediately if— (A)
        the counterparty commits an event of default under the transaction; or
        (B) an event of default occurs in respect of the counterparty; and

        (ii)   the institution has, immediately upon any such default, an
               unfettered and legally enforceable right to seize and realize
               the collateral for its benefit, whether or not the counterparty
               is insolvent or bankrupt.

(3) Where the recognized collateral is provided to an authorized institution
under a repo-style transaction which satisfies all the provisions of
subsection (2) except paragraph (a) of that subsection, the institution may
under subsection (1) allocate a risk-weight of 10% to the collateral.

(4) An authorized institution may under subsection (1)—

   (a)  allocate a risk-weight of 0% to recognized collateral provided under
        an OTC derivative transaction or a credit derivative contract where—

        (i)    the transaction or contract is marked-to-market daily and is
               collateralized by cash provided to the institution; and

        (ii)   the settlement currency of the transaction or contract and the
               cash provided to the institution as collateral have no
               currency mismatch;

   (b)  allocate a risk-weight of 10% to recognized collateral which is
        provided under an OTC derivative transaction or a credit derivative 
        contract where—

        (i)    the transaction or contract is marked-to-market daily, and is
               collateralized by debt securities issued by a sovereign, or a
               sovereign  foreign public sector entity, which would under
               section 55 or 57, as the case may be, be allocated a
               risk-weight of 0%; and

        (ii)   the settlement currency of the transaction or contract and the
               collateral provided to the institution have no
               currency mismatch;

   (c)  allocate a risk-weight of 0% to recognized collateral which
falls within paragraph (c) of the definition of "cash items" in section 51;

   (d)  allocate a risk-weight of 0% to recognized collateral provided in the
        case of any financial transaction where—

        (i)    the collateral and the exposure to which the collateral relates
               have no currency mismatch; and

        (ii)   the collateral is either— (A) cash; or (B) debt securities—
               (I) which are issued by a sovereign, or a
               sovereign foreign public  sector entity, and would under
               section 55 or 57, as the case may be, be allocated a
               risk-weight of 0%; and (II) the current market value of which
               has been reduced by a haircut of 20%.

(5) In this section—

"cash" (現金)—

   (a)  in relation to an exposure, means money paid by an authorized
        institution to a counterparty under a repo-style transaction;

   (b)  in relation to a collateral, means recognized collateral which falls
        within section 79(a), (b) or (c), other than collateral held at a
        third-party bank in a non-custodial arrangement.

"cash" (現金)