Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 89

Calculation of net credit exposure of credit derivative contracts booked in trading book and OTC derivative transactions

An authorized institution shall calculate its net credit exposure to a
counterparty in respect of a credit derivative contract booked in the
trading book of the institution, or an OTC derivative transaction, by the use
of Formula 4.

FORMULA 4

CALCULATION OF NET CREDIT EXPOSURE TO COUNTERPARTY UNDER CREDIT DERIVATIVE
CONTRACT BOOKED IN TRADING BOOK OR OTC DERIVATIVE TRANSACTION

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

where— E* = net credit exposure; E = credit equivalent amount of off-balance
sheet exposure

(calculated by aggregating the potential exposure and current exposure in
respect of the credit derivative contract or OTC derivative transaction, as
the case may be) net of specific provisions, if any; 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.