Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 95

Netting of OTC derivative transactions and netting of credit derivative contracts booked in trading book

(1) Where an authorized institution's exposure to a counterparty is under a
nettable derivative transaction (whether or not the recognized  netting
concerned relates to more than one type of nettable derivative  transaction),
the institution may, in accordance with subsections (2) and

(3), take into account the effect of the recognized netting in calculating the
risk-weighted amount of its net credit exposure to the counterparty.

(2) Subject to subsection (3), an authorized institution shall calculate the
credit equivalent amount of its net credit exposure to a counterparty by
adding together—

   (a)  the net current exposure (being the sum of the positive and negative
        mark-to-market replacement costs of the individual nettable
        derivative transactions subject to recognized netting if the sum is
        positive); and

   (b)  the net potential exposure calculated by the use of Formula 8.

FORMULA 8

CALCULATION OF NET POTENTIAL EXPOSURE UNDER NETTABLE DERIVATIVE TRANSACTIONS

ANet = 0.4 × AGross + 0.6 × NGR × AGross

where— ANet = the net potential exposure; AGross = the sum of the individual
amounts derived by multiplying the principal amounts of all of the individual
nettable derivative transactions by the applicable CCFs; and NGR = the ratio
of net replacement cost for the nettable derivative transactions (that is, the
non-negative sum of the positive and negative mark-to-market replacement costs
of the transactions) to gross replacement cost for the nettable
derivative transactions (that is, the sum of the positive mark-to-market
replacement costs of the transactions).

(3) An authorized institution, in the application of Formula 8 in respect of
its nettable derivative transactions, shall calculate the NGR in that Formula
either on a per counterparty basis, or on an aggregate  basis.

(4) An authorized institution shall allocate to the credit  equivalent amount
of its net credit exposure to the counterparty calculated in accordance with
subsection (2), net of specific provisions, the attributed risk-weight of the
counterparty.

(5) Where a net credit exposure to a counterparty is covered by
recognized collateral under the comprehensive approach to the treatment of
recognized collateral, Formula 4 shall, with all necessary modifications, be
used by the authorized institution to calculate the credit equivalent  amount
after taking into account the effect of the recognized collateral.

(6) In this section—

"aggregate basis" (總和基準), in relation to the calculation of the NGR in
Formula 8, means the ratio of the sum of the net replacement costs for all
nettable derivative transactions with each counterparty to the sum of gross
replacement costs for all nettable derivative transactions with each
counterparty;

"derivative transaction" (衍生工具交易) means—

   (a)  an OTC derivative transaction; or

   (b)  a credit derivative contract booked in the trading book;

"per counterparty basis" (每位對手方基準), in relation to the
calculation of the NGR in Formula 8, means the ratio of net replacement cost
to gross replacement cost for the nettable derivative transactions with a
particular counterparty.

"aggregate basis" (總和基準)

"derivative transaction" (衍生工具交易)

"per counterparty basis" (每位對手方基準)