On 13 Dec 2024, the HKMA published supplementary guidance clarifying the application of Part 6A of the Banking (Capital) Rules to counterparty credit risk. The guidance addresses scope exclusions for FX spot contracts and embedded derivatives, defines SA-CCR classification criteria, and details collateral treatment for SFTs and CCP exposures. It confirms that collateral posted outside netting sets must be accounted for under Part 4, and default fund contributions to qualifying CCPs are exempt from standard haircuts in capital calculations.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
Market Misconduct Tribunal: A Guide to Penalties and Other Consequences for Misuse of Insider Information
Market Misconduct Tribunal proceedings for mishandling of insider information can result in fines and disgorgement orders
SFO, s. 300: Fraudulent & Deceptive Conduct Provisions to Combat Insider Dealing and Other Misconduct
The Court of Appeal decision in Securities and Futures Commission v. Young Bik Fung confirmed that insider dealing as well as other market misconduct could be r
SPOTLIGHT ON
FAMILY OFFICES
General Scope Clarifications
On 13 Dec 2024, the HKMA issued supplementary guidance clarifying the application of Part 6A of the Banking (Capital) Rules (BCR) to counterparty credit risk exposures. The guidance confirms FX spot contracts fall outside Part 6A scope unless classified as 'long settlement transactions' under §2(1) of the BCR. It further clarifies that credit default swaps embedded in credit-linked notes and put options in currency-linked deposits are generally outside Part 6A scope if the credit risk exposure is fully paid upfront. Bond transactions with settlement beyond five business days are deemed 'long settlement transactions' and thus subject to Part 6A.
SA-CCR Approach Modifications
The guidance details key clarifications for the Standardised Approach for Counterparty Credit Risk (SA-CCR). It specifies that derivative contracts must be classified based on primary risk drivers (e.g., interest rate contracts driven by interest rate risk), with CNH and CNY treated as distinct currencies for hedging sets. One-way margin agreements are not considered 'variation margin agreements' under §226BA, requiring treatment as unmargined contracts. For long settlement transactions involving securities, classification as interest rate or credit-related contracts depends on the AI's assessment of the primary risk factor driving market value changes.
Collateral and Risk Weighting Rules
The guidance clarifies collateral treatment under §78(1A)-(1C), confirming that collateral posted outside netting sets must be accounted for under Part 4 (not Part 6A), with credit risk mitigation applied via §85 or §88. For SFTs and derivatives within the same netting set, all exposures are treated as general bank exposures under §59 if any component exceeds three months' original maturity. Cash collateral posted for credit risk mitigation is not subject to capital charges for credit or market risk under Part 4, 5, 6, 7, or 8.
IMM(CCR) Approach and CCP Exposures
Under the Internal Model Method for Counterparty Credit Risk (IMM(CCR)), the guidance specifies that 'current market data' includes market-implied data for exposure calculations. For stressed calibration under §226D, AIs must select a stress period based on their specific circumstances, with regular assessments required. Regarding CCP exposures, the HKMA confirms that default fund contributions posted to qualifying CCPs (QCCPs) are not subject to standard haircuts in capital calculations, and collateral segregation must prevent losses due to clearing member default or insolvency.
SFTs and Current Exposure Method
The guidance clarifies that SFTs arranged by an AI as agent (with a guarantee to the customer) are treated as principal transactions requiring capital charges. For SFTs with non-zero minimum transfer amounts (MTA), 'collateral that is called' excludes amounts below MTA not actually transferred. Under the Current Exposure Method, debt security contracts are classified as interest rate or credit-related derivatives to determine applicable credit conversion factors, with recognized netting not considered under the modified Current Exposure Method.
View the full article:Source
