June 28, 2019

HKMA published a consultation paper sets out its proposal for revising the current regulations on the market risk capital charges in the Banking (Capital) Rules (BCR). The consultation paper outlines the HKMA plans for implementing the revised market risk framework in Hong Kong, in line with the minimum capital requirements for market risk, which the Basel Committee published in January 2019. Comment period for the proposal ends on September 30, 2019. HKMA intends to implement the new standards by January 01, 2022, in line with the BCBS timeline. Locally incorporated authorized institutions would be required to start regulatory reporting based on the new standards from January 01, 2022, with the first regulatory reporting date being January 31, 2022.

The proposal covers the new Standardized Approach, the new Internal Models Approach, the Simplified Standardized Approach, requirements related to the boundary between the trading book and banking book, and details on the qualifying criteria for using de-minimis exemptions. All authorized institutions, except for those that are allowed to use the Simplified Standardized Approach or qualify for the de-minimis exemption, should calculate the capital charges using the Standardized Approach. Under the revised market risk framework, market risk is defined as the risk of losses arising from movements in market prices. The risks subject to market risk capital charges include interest rate risk, credit spread risk, equity risk, foreign exchange risk, commodities risk, and default risk for trading book instruments; in addition to the foreign exchange risk and commodities risk for banking book instruments. Although regular reporting will in principle take place only at intervals, an authorized institution is expected to:

  • Manage its market risk in such a way that the capital charges are being met at any time. The authorized institution must not window-dress by showing systematically lower market risk positions on reporting dates.
  • Maintain strict risk management systems to ensure that intra-day exposures are not excessive. If an authorized institution fails to meet the capital charges at any time, it should take immediate measures to rectify the situation.

Authorized institutions planning to adopt the Internal Models Approach with effect from January 01, 2022 should start discussing their implementation plans with their usual supervisory contact at the HKMA by December 2019 and inform the HKMA of such plans in writing by March 31, 2020. An implementation plan should at least include an outline of key characteristics of the internal models and clearly state the intended implementation timeline, the proposed trading desk structure, and the market risk exposures intended to be covered. Authorized institutions planning to adopt the Simplified Standardized Approach with effect from January 01, 2022 should submit a written application to their usual supervisory contact at HKMA by December 31 , 2020. HKMA will notify individual  authorized institutions by January 29, 2021 whether they are considered eligible to use the Simplified Standardized Approach.

 

Comment Due Date: September 30, 2019

Keywords: Asia Pacific, Hong Kong, Banking, Market Risk, Regulatory Capital, Standardized Approach, Internal Model Approach, Simplified Standardized Approach, Basel III, Banking Capital Rules, HKMA

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