Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 96

Netting of repo-style transactions

(1) An authorized institution which uses the comprehensive approach in its
treatment of recognized collateral shall not take into account the effect of
recognized netting covering the institution's repo-style  transactions in the
calculation of its capital adequacy ratio insofar as it relates to credit risk
other than in accordance with the provisions of this section.

(2) Where under nettable repo-style transactions the subject of
recognized netting an authorized institution has the same counterparty, the
institution shall calculate—

   (a)  the aggregate value of all money and securities sold, transferred,
        loaned or paid to the counterparty; and

   (b)  the aggregate value of money and securities received by the
        institution consisting of—

        (i)    in the case of repo-style transactions booked in the
               institution's banking book, securities which would be
               recognized  collateral falling within section 80(a), (b) or (c)
               under the comprehensive approach to the treatment of
               recognized collateral; and

        (ii)   in the case of repo-style transactions booked in the
               institution's trading book, any securities.

(3) Subject to section 97, where, in respect of a calculation under subsection
(2) made by an authorized institution in respect of a counterparty, the
aggregate value referred to in subsection (2)(a) is greater than the aggregate
value referred to in subsection (2)(b), the institution shall calculate its
net credit exposure to the counterparty by the use of Formula 9.

FORMULA 9

CALCULATION OF NET CREDIT EXPOSURE TO COUNTERPARTY WHERE AGGREGATE VALUE
REFERRED TO IN SECTION 96(2)(a) IS GREATER THAN AGGREGATE VALUE REFERRED TO IN
SECTION 96(2)(b)

E# = max {0, [(Σ(E) – Σ(C)) + Σ(Es × Hs) + Σ(Efx × Hfx)]}

where— E# = net credit exposure; E = current market value of money and
securities sold, transferred, loaned or paid by the authorized institution; C
= current market value of money and securities received by the authorized
institution; Es = absolute value (irrespective of positive or negative) of the
net position in the same securities; Hs = haircut applicable to the absolute
value of the net position in the same securities (that is, Es) 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; Efx =
absolute value of the net position in a currency different from the settlement
currency; and Hfx = haircut applicable in consequence of a currency  mismatch,
if any, between the currency in which a net position is denominated and the
settlement currency pursuant to the standard  supervisory haircut for
currency mismatch set out in Schedule 7 subject to adjustment as set out in
section 92.

(4) An authorized institution shall allocate to its net credit exposure to a
counterparty, calculated in accordance with subsection (3), the
attributed risk-weight of the counterparty.

(5) An authorized institution—

   (a)  subject to paragraph (b), shall net its nettable repo-style 
        transactions booked in its banking book separately from netting its
        nettable repo-style transactions booked in its trading book and vice
        versa;

   (b)  may net repo-style transactions booked in its banking book with
        repo-style transactions booked in its trading book in respect of the
        same counterparty if—

        (i)    all those repo-style transactions are marked-to-market daily;
               and

        (ii)   all the securities received by the institution in respect of
               all those repo-style transactions are recognized collateral
               falling within section 80(a), (b) or (c) under the
               comprehensive approach to the treatment of
               recognized collateral.