Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 88

Calculation of net credit exposure of off-balance sheet exposures other than credit derivative contracts booked in trading book or OTC derivative transactions

An authorized institution shall calculate its net credit exposure to an
obligor in respect of an off-balance sheet exposure (other than a credit 
derivative contract booked in the trading book of the institution or an
OTC derivative transaction) by the use of Formula 3.

FORMULA 3

CALCULATION OF NET CREDIT EXPOSURE TO OBLIGOR UNDER OFF-BALANCE SHEET EXPOSURE
OTHER THAN CREDIT DERIVATIVE CONTRACT BOOKED IN THE TRADING BOOK AND OTC
DERIVATIVE TRANSACTION

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

where— E* = net credit exposure; E = principal amount of off-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; 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; and CCF = CCF applicable to the off-balance sheet exposure.