Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 87

Calculation of net credit exposure of on-balance sheet exposures

An authorized institution shall calculate its net credit exposure to an
obligor in respect of an on-balance sheet exposure by the use of Formula 2.

FORMULA 2

CALCULATION OF NET CREDIT EXPOSURE TO OBLIGOR UNDER ON-BALANCE SHEET EXPOSURE

E* = max {0, [E × (1 + He) – C × (1 – Hc – Hfx)]}

where— E* = net credit exposure; E = principal amount of on-balance sheet
exposure net of specific provisions, if any; He = haircut applicable to the
authorized institution's exposure to the obligor pursuant to the
standard supervisory haircuts for the comprehensive approach to the treatment
of recognized collateral subject to adjustment as set out in section 92; C =
current market value of the recognized collateral before adjustment required
by the comprehensive approach to the treatment of recognized collateral; Hc =
haircut applicable to the recognized collateral pursuant to the
standard supervisory haircuts for the comprehensive  approach to the treatment
of recognized collateral subject to adjustment as set out in section 92; and
Hfx = haircut applicable in consequence of a currency  mismatch, if any,
pursuant to the standard supervisory haircuts for the comprehensive approach
to the treatment of recognized collateral subject to adjustment as set out in
section 92.