On 19 Dec 2025, the Hong Kong Monetary Authority issued Version 2 of the Market Risk Capital Charge (MR-1) supervisory policy manual, implementing a market risk capital framework aligned with the Basel Committee's Fundamental Review of the Trading Book. The framework establishes three approaches for calculating market risk capital charges: the standardised (market risk) approach (STM), internal models approach (IMA), and simplified standardised approach (SSTM). It also provides specific treatment for cryptoasset exposures, with Group 1 cryptoassets mapped to traditional risk categories and Group 2a cryptoassets subject to modified SSTM or STM approaches.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction and Purpose
On 19 Dec 2025, the Hong Kong Monetary Authority (HKMA) issued Version 2 of the Supervisory Policy Manual on Market Risk Capital Charge (MR-1), replacing the previous version dated 15 March 2024. This updated framework implements the HKMA's market risk capital requirements closely aligned with the Basel Committee on Banking Supervision's Fundamental Review of the Trading Book (FRTB) standards, as set out in Part 8 of the Banking (Capital) Rules. The framework covers the standardised (market risk) approach (STM), internal models approach (IMA), simplified standardised approach (SSTM), and requirements related to the boundary between the trading book and banking book.
Key Regulatory Approaches
The HKMA has established three primary approaches for calculating market risk capital charges. The STM approach requires Als to calculate capital charges using sensitivities-based method (SBM), residual risk add-on (RRAO), and standardised default risk charge (SA-DRC). The IMA requires explicit HKMA approval for trading desks, with requirements for model eligibility, backtesting, and profit and loss attribution tests (PLAT). The SSTM approach is available for smaller Als meeting specific quantitative and qualitative criteria, including market risk risk-weighted assets not exceeding HKD 1 billion and not exceeding 2% of total risk-weighted assets.
Trading Book Boundaries and Internal Risk Transfers
The framework establishes detailed rules for determining whether instruments belong in the trading book or banking book, with specific requirements for instruments held for short-term resale, profiting from short-term price movements, locking in arbitrage profits, or hedging risks. Internal risk transfers between books are subject to strict restrictions, with no regulatory capital recognition for internal risk transfers from the trading book to the banking book. For internal risk transfers from the banking book to the trading book, the framework specifies requirements for credit risk, general interest rate risk, and CVA risk capital charges.
Cryptoasset Exposure Requirements
The framework provides specific treatment for cryptoasset exposures. Group 1 cryptoassets (including Group 1a and Group 1b) are mapped to traditional risk categories they represent, with netting and hedging recognition between tokenised assets and their traditional equivalents. Group 2a cryptoassets must be assigned to the trading book and are subject to modified SSTM or STM approaches with specific capital requirements. Group 2b cryptoassets are not subject to market risk capital charges but are subject to conservative treatment under the Banking (Capital) Rules.
Implementation Details
Version 2 of the MR-1 module takes effect on 1 January 2026, the same date as the commencement of the Banking (Capital) (Amendment) Rules 2025. The framework includes a de-minimis exemption for Als with market risk positions permanently below HKD 60 million and 6% of total on-balance sheet and off-balance sheet positions. Als must calculate market risk capital charges under the STM approach, unless approved for IMA or SSTM approach. The framework also establishes requirements for trading desk definitions, including the need for HKMA approval for trading desks seeking IMA approval.
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