On 13 Aug 2024, the HKMA issued Q&As clarifying market risk capital treatment under the Banking (Capital) Rules 2023, confirming funding swaps as trading book instruments unless hedge-designated, defining conditions for GIRR internal risk transfer recognition, permitting listed REITs in qualified indices to be treated as equities, and specifying that short FX hedges cannot exclude positions from capital calculations. The clarifications also confirm CNY/CNH exposures share a currency bucket for risk measurement.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 13 Aug 2024, the Hong Kong Monetary Authority (HKMA) issued Q&As clarifying the application of market risk and CVA risk provisions under the Banking (Capital) Rules 2023, specifically addressing interpretations of existing regulatory requirements.
Trading Book Classification Clarifications
The Q&As clarify that funding swaps used to manage foreign currency funding needs in the banking book are presumed to be trading book instruments under section 281B(3)(a) unless designated as hedge accounting instruments. AIFs seeking deviation must obtain explicit HKMA approval per section 281B(4). Distressed loans or related interest rate instruments recovered before distress are excluded from the trading book presumptive list; however, transactions intentionally entered post-distress for short-term price movements fall under the presumptive list.
Internal Transactions and Capital Recognition
Internal transactions between trading and banking books generally receive no capital recognition. However, internal risk transfers of general interest rate risk (GIRR) may qualify for capital recognition if they comply with the GIRR internal risk transfer framework in section 281D(3).
Real Estate and FX Risk Treatment
Listed real estate investment trusts (e.g., Link REIT) constituting a qualified index under section 281N(9) may be treated as listed equities for regulatory book assignment, allowing classification in the trading book. For FX risk, short derivative positions hedging structural FX exposures cannot be excluded from market risk capital calculations under section 281E(3)(a) unless the AI elects to net long and short positions within the structural FX bucket.
CNY/CNH Interest Rate Exposure
CNY (onshore) and CNH (offshore) interest rate exposures are treated as separate curves but belong to the same currency bucket under the sensitivities-based method, per SPM MR-1 paragraph 3.3.4.
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