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515.5995

Guidelines & Circulars

Our Ref.:
G4/26/6C
B9/75C(05)

20 March 2007

The Chief Executive
All locally incorporated authorized institutions

Dear Sir/Madam,

Proposed Gazette Notice under Section 81(3)

I am writing in relation to the specification of off-balance sheet items and their respective credit conversion factors for the purposes of Section 81(2)(c) of the Banking Ordinance as amended by the Banking (Amendment) Ordinance (BAO)2005.

As you are aware, the Banking (Capital) Rules have replaced the former Third Schedule to the Ordinance with effect from 1 January 2007. Provisions of the Ordinance with cross references to the Third Schedule have also been amended since then. Among the provisions amended was section 81(2)(c), along with the repealing of the Specification of Factors (Financial Exposure of Authorized Institution) Notice (Cap. 155 sub. Leg. C) formerly issued under section 81(3) to specify the off-balance sheet items and their credit conversion factors for the purposes of section 81(2)(c).

The current section 81(2)(c) requires that the financial exposure of an AI for the purposes of section 81 include:

"the product of

(i) the principal amount of any item that, in relation to the institution, is an off-balance sheet item for the purpose of rules made under section 98A(1) (i.e. the Banking (Capital) Rules); and

(ii) the factor specified by the Monetary Authority pursuant to subsection (3) (of section 81) for that item (i.e. the credit conversion factor)."

We are now in the process of preparing for the release of a new Gazette notice under section 81(3) for the purposes of the current section 81(2)(c).

It is the HKMA's policy intention to retain in the new Gazette notice the coverage of off-balance sheet items as well as the applicable credit conversion factors specified in the previous Gazette notice. Such items can now be cross-referenced to those set out in Table 14 of the Banking (Capital) Rules and all of these items will continue be subject to the credit conversion factor of 100% for the purposes of section 81. For details of the proposed Gazette notice, please refer to the table at the Annex. You will notice that the item "Sale and repurchase agreements" in the former notice has been removed. In view of the current practice of treating such agreements, which normally involve only securities, as on-balance sheet assets, they will be captured under section 81 (a) or (b).

Pending release of the new Gazette notice, your institution is expected to comply with section 81 and report the banking return on Large Exposures (MA(BS)1D) and certificate of compliance (MA(BS)1F(a)) on the above basis. Should you have any queries on the above, please feel free to contact Theresa Kwan at 2878 1093 or Raymond Tsui at 2878 1623.

Yours faithfully,

Simon Topping
Executive Director (Banking Policy)

Encl.
Proposed Gazatte notice Section 81(3) (PDF file, 14KB)
c.c.
The Chairman, The Hong Kong Association of Banks
The Chairman, The DTC Association
FSTB (Attn: Mr Clement Chan)
Last revision date: 1 August 2011
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