| (1) | The content of the relevant return is confidential and not available for inspection by the public. |
| (2) | The purpose of the return, amongst other things, is to determine the nature and extent of the reporting bank's exposure to investment risk arising from equity positions and other relevant investments or instruments held in its banking book. |
| (3) | Criteria relating to categorisation of equity exposures held in a bank’s banking book |
Based on the economic substance and not the legal form of an instrument, and irrespective of whether or not the said instrument makes provision for a voting right, for the purposes of these Regulations equity exposures held in a bank’s banking book—
[Heading and words preceding regulation 31(3)(a) substituted by section 6(a) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (i) | any direct ownership interest in the assets and income of a commercial or financial institution; |
| (ii) | any indirect ownership interest in the assets and income of a commercial or financial institution, including— |
| (A) | a derivative instrument held, which derivative instrument is linked to an equity interest; |
| (B) | any instrument or interest held in a corporation, partnership, limited liability company or other type of enterprise that issue ownership interests and which in turn principally is engaged in the business of investing in equity instruments; |
| (iii) | any instrument that— |
| (A) | is not redeemable, that is, the return of invested funds can be achieved only by way of the sale of the relevant instrument, the sale of the rights to the relevant investment or the liquidation of the issuer of the relevant instrument; |
| (B) | does not constitute an obligation of the issuer of the instrument; |
| (C) | entitles the holder of or investor in the said instrument to a residual claim in respect of the assets or income of the issuer of the said instrument; |
| (D | exhibits or contains characteristics similar to an instrument that qualifies as common equity tier 1 capital of a bank, as defined in section 1 of the Act; |
[Regulation 31(3)(a)(iii)(D) substituted by regulation 14(a) of Notice No. 297, GG 40002, dated 20 May 2016]
| (E) | constitutes an obligation of the issuer of the instrument and the said obligation or instrument makes provision for any one of the conditions or circumstances specified below: |
| (i) | The issuer of the said instrument has the right indefinitely to defer the settlement of the said obligation. |
| (ii) | The obligation specifies that settlement will, or at the discretion of the issuer may, take place by way of the issuance of a fixed number of equity shares of the obligor. |
| (iii) | The obligation specifies that settlement will, or at the discretion of the issuer may, take place by way of the issuance of a variable number of the issuer's equity shares and any change in the value of the obligation is related to, and in the same direction as, the change in the value of a fixed number of the issuer's equity shares. |
| (iv) | The holder of the instrument has the option to require that the obligation be settled in equity shares. |
(b) shall exclude any instrument—
| (i) | held in any institution or entity of which the assets and liabilities are consolidated with the assets and the liabilities of the reporting bank or controlling company; |
| (ii) | that constitutes a deduction against the common equity tier 1 capital and reserve funds or additional tier 1 capital and reserve funds or tier 2 capital and reserve funds of the reporting bank; |
[Regulation 31(3)(b)(ii) substituted by regulation 14(b) of Notice No. 297, GG 40002, dated 20 May 2016]
| (iii) | specified in writing by the Registrar, which instrument or any part thereof, in the discretion of and subject to the conditions specified in writing by the Registrar, should be treated as debt instead of equity. |
(4) Based on—
| (a) | the relevant requirements specified in regulation 23, including in particular regulations 23(6)(j), 23(8)(j), 23(11)(b)(vii), 23(11)(c)(v) and/or 23(11)(d)(v), as the case may be; |
| (b) | the relevant requirements specified in this regulation 31; and |
| (c) | the relevant requirements specified in regulation 38, including in particular regulations 38(2)(a) and/or 38(8), as the case may be, |
a bank shall calculate and report, among other things, its relevant specified exposure amounts, risk weighted exposure amounts and/or required amount of capital and reserve funds.
| (5) | Once a bank adopts the IRB approach as envisaged in regulation 23(10) for all or part of any of its corporate, bank, sovereign, or retail asset classes, the bank shall simultaneously adopt the IRB approach for its equity exposures, subject only to materiality levels as may be specified in writing by the Registrar from time to time, provided that the Registrar may require a bank to implement one of the IRB equity approaches specified in subregulation (6) below when the bank's equity exposures constitute a significant part of its business, even though the bank may not adopt an IRB approach in respect of other asset classes, business units or activities. |
| (6) | Calculation of risk weighted exposure in respect of equity instruments held in the banking book of a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk |
| (a) | Subject to the provisions of regulation 38(2)(a), a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk shall calculate its risk-weighted assets and related required amount of capital and reserve funds in respect of equity exposures held in its banking book in accordance with the market-based approach or PD/LGD approach specified below, or, subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, a combination of the said approaches, provided that— |
| (i) | the bank shall apply a selected approach in a consistent manner; |
| (ii) | each relevant risk category shall be assessed using a single approach; |
| (iii) | all relevant elements of the reporting bank's exposure to equity risk in the banking book shall be subject to the bank's risk management policies, processes and procedures, and the relevant requirements specified in this subregulation (6); |
| (iv) | no bank shall be allowed to apply a combination of approaches— |
(A) within a specific risk category; or
(B) in respect of the same type of risk, across different risk centres;
| (v) | any relevant equity exposure that constitutes a deduction against the reporting bank's capital and reserve funds in terms of the provisions of regulations 23(6), 23(8), 23(11), 23(13) or 38(5) shall be included in the form BA 340, and the relevant amount shall be deducted from the bank's capital and reserve funds in accordance with the relevant requirements specified in section 70 of the Act read with the provisions of the aforesaid regulations; |
| (vi) | a bank that adopted the market-based approach— |
| (A) | shall continuously comply with the relevant minimum requirements specified in regulation 23(11)(b)(vii) if the bank wishes to apply the internal model market-based approach specified in paragraph (b)(ii) below; |
| (B) | shall calculate its risk weighted exposure in terms of the simple riskweight method when the bank is unable to comply with the said minimum requirements relating to the internal model market-based approach specified in regulation 23(11)(b)(vii); |
| (C) | may in the calculation of the bank's risk-weighted exposure recognise the effects of guarantees, but not collateral, obtained in respect of a particular equity position; |
| (vii) | a bank that adopted the PD/LGD approach shall in addition to the requirements specified in paragraph (c) below, comply with the relevant minimum requirements relating to corporate exposure specified in regulations 23(11)(b) (v) (A), 23(11) (b)(v)(B), 23(11)(b)(vi)(A) and 23(11) (d)(ii); |
| (viii) | no investment in a significant minority owned or majority owned or controlled commercial entity, which investment amounts to less than 15 per cent of the sum of the bank's issued common equity tier 1 capital and reserve funds, additional tier 1 capital and reserve funds and tier 2 capital and reserve funds of the reporting bank, as reported in items 41, 65 and 78 of the form BA 700, shall be assigned a risk weight of less than 100 per cent; |
| (ix) | based on such conditions, requirements or criteria as may be specified in writing by the Registrar, the Registrar may exempt from the provisions of this subregulation (6) specified types of equity exposure; |
[Regulation 31(6)(a)(ix) substituted by regulation 14(c) of Notice No. 297, GG 40002, dated 20 May 2016]
| (x) | any investment in an equity instrument shall be valued in accordance with the relevant provisions of Financial Reporting Standards issued from time to time, which value shall also be applied by the reporting bank in the calculation of the bank's relevant risk weighted exposure amount and the related required amount of capital and reserve funds; |
| (xi) | the bank shall apply the relevant requirements specified in subregulation (7) below to any equity investment in any type of fund, held in the bank’s banking book; |
[Regulation 31(6)(a)(xi) substituted by section 6(b) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (xii) | the bank’s total risk weighted exposure amount relating to equity instruments held in the bank’s banking book, and the related required amount of capital and reserve funds, shall be equal to the sum of amounts calculated in accordance with the relevant requirements specified in this subregulation (6). |
[Regulation 31(6)(a)(xii) substituted by regulation 14(d) of Notice No. 297, GG 40002, dated 20 May 2016]
A bank that adopted the market based approach for the calculation of its capital requirements relating to equity positions held in the bank's banking book shall apply one or both of the methods specified below in respect of the bank's various equity portfolios provided that the method selected by the bank shall be consistent with the complexity of the bank's equity holdings and shall be applied in a consistent manner.
| (i) | Simple risk weight method |
A bank that adopted the simple risk weight method—
| (A) | shall assign to the appropriate categories specified in table 1 below the bank's relevant net equity positions, calculated in accordance with the relevant definition of a long or short position. |
Table 1
Description
|
Risk weight
|
Publicly traded equity, that is, any equity instrument traded on a licensed exchange 1
|
300%
|
Other equity positions 1
|
400%
|
| 1. | Including the absolute values of net short positions. |
| (B) | may net short cash positions and positions relating to derivative instruments held in its banking book against long positions held in respect of the same instrument, provided that— |
| (i) | the said instrument shall explicitly be designated as a hedge in respect of that particular equity instrument; and |
| (ii) | both instruments shall have remaining maturities of no less than one year; |
| (C) | shall treat any maturity mismatched positions in accordance with the relevant requirements relating to corporate exposures specified in regulation 23(11)(d)(ii) read with the relevant requirements specified in regulation 23(12)(f). |
| (ii) | Internal models approach |
A bank that adopted or has been directed by the Registrar to apply the internal models approach shall calculate its risk-weighted exposure relating to its equity positions through the application of the formula specified below:
RWA = K x 12,5
where:
| RWA | is the relevant risk-weighted exposure amount |
| K | is the capital requirement, which capital requirement— |
| (A) | shall be equal to the potential loss that may arise from the bank's equity positions held in its banking book, derived from the bank's internal value-at-risk model; |
| (B) | shall be based on a 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, |
provided that the said capital requirement—
| (i) | shall not be less than the capital requirement calculated in terms of the simple risk-weight method specified in subparagraph (i) above, applying a risk weight of 200 per cent in respect of publicly traded equity and a risk weight of 300 per cent in respect of all other equity positions; |
| (ii) | shall be calculated in respect of individual instruments and not at a portfolio level. |
A bank that adopted the PD/LGD approach shall calculate its risk-weighted exposure amount in respect of equity positions held in the bank's banking book in accordance with the relevant requirements relating to corporate exposure specified in regulation 23(11)(d)(ii), provided that—
| (i) | the bank's estimate of the PD ratio of a corporate institution in which the bank holds an equity position shall be based on the same requirements as the bank's estimate of the PD ratio of a corporate institution in respect of which the bank has a debt exposure. |
When the bank has no debt exposure in respect of a corporate institution in which the bank holds an equity instrument and the bank has insufficient information in respect of the said corporate institution to adhere to the definition of default, but the bank complies with the other relevant standards, the bank shall apply a scaling factor of 1.5 to the relevant risk weight derived from the relevant corporate risk-weight function;
| (ii) | when a default event occurs in respect of a debt obligation of a particular corporate institution in which the reporting bank holds an equity position, it shall for purposes of these Regulations be deemed that a simultaneous default event occurred in respect of the said equity position held by the bank; |
| (iii) | the bank shall in respect of each relevant equity exposure apply— |
| (A) | a LGD ratio of 90 per cent, and |
| (B) | a five year maturity adjustment; |
| (iv) | the bank shall apply a minimum risk weight of 100 per cent in respect of— |
| (A) | public equities, provided that— |
| (i) | the bank's investment forms part of a long-term customer relationship; |
| (ii) | capital gains are not expected to be realised in the short term; |
| (iii) | the bank has lending and/or general banking relationships with the portfolio company in order to estimate or obtain the probability of default; |
| (B) | private equities, provided that— |
| (i) | the bank's return on the investment is based on regular and periodic cash flows, which cash flows are not derived from capital gains; |
| (ii) | the bank has no expectation of any abnormal future capital gain or realising any existing gain in respect of the said investment; |
| (v) | in the case of all equity positions other than the equity positions referred to in subparagraph (iv) above, including any net short positions, the bank's capital requirement shall not be less than the capital requirement calculated in terms of the simple risk weight method, based on a risk weight of 200 per cent in respect of publicly traded equity and a risk weight of 300 per cent in respect of other equity exposures; |
| (vi) | the bank shall include in its calculation any equity instruments held in respect of companies that are included in one of the bank's retail portfolios; |
| (vii) | when the sum of a bank's unexpected loss (UL) and expected loss (EL) associated with a relevant equity exposure held in the bank's banking book results in a lower amount of required capital and reserve funds than what would be the case when the relevant aforesaid specified minimum risk weights are applied, the bank shall apply the relevant aforesaid specified minimum risk weights to that relevant equity position held; |
| (viii) | the maximum risk weight in respect of any equity exposure, including any relevant expected loss amount, shall be equal to 1250 per cent; |
[Regulation 31(6)(c)(vii) substituted by regulation 14(e) of Notice No. 297, GG 40002, dated 20 May 2016]
| (ix) | when the bank obtained a hedge in respect of the equity exposure, the bank shall apply— |
| (A) | an LGD ratio of 90 per cent in respect of the exposure to the protection provider; and |
| (B) | a five-year maturity in respect of the said equity exposure. |
| (7) | Matters related to the risk weighted exposure and related required amount of capital and reserve funds in respect of equity investments in all types of funds held in a bank’s banking book |
| (a) | Irrespective of whether a bank adopts the standardised approach or IRB approach for the measurement of the bank’s exposure to credit risk, the bank shall use one of the alternative methodologies specified below for the calculation of its relevant risk weighted exposure amount in respect of its equity investments in all types of funds held in the bank’s banking book, including any relevant off-balance-sheet exposure, such as, for example, an unfunded commitment to subscribe to a fund’s future capital calls: |
| (i) | when the bank is able to comply with the relevant specified conditions, the look-through approach specified in paragraph (b) below, which is the most granular approach; |
| (ii) | when the bank is unable to comply with the relevant specified conditions related to the look-through approach, the mandate-based approach specified in paragraph (c) below, which provides an additional layer of risk sensitivity when compared to the look-through approach; |
| (iii) | when neither of the aforementioned approaches is feasible, the fall-back approach specified in paragraph (d) below; |
subject to the prior written approval of and such conditions as may be specified in writing by the Authority, a combination of the aforementioned three approaches, to determine the bank’s capital requirement for an equity investment in an individual fund:
Provided that—
| (A) | the bank shall calculate its relevant risk weighted exposure amount in respect of any equity investment in all types of funds held in the bank’s trading book in accordance with the relevant requirements specified in the form BA 320 read with regulation 28 of these Regulations; |
| (B) | the bank may exclude from the look-through approach, mandate-based approach and the fall-back approach all equity investments in entities of which the debt obligations qualify for a risk weight of zero per cent in terms of the standardised approach for the measurement of the bank’s exposure to credit risk, specified in regulation 23(8) of these Regulations; |
| (C) | the bank shall exclude from the look-through approach, mandate-based approach and the fall-back approach any direct or indirect investment or exposure, including any relevant underlying exposure held by a fund, that is required to be deducted from the bank’s capital and reserve funds in accordance with the relevant requirements specified in regulation 38(5) of these Regulations; |
| (D) | when the bank has an investment in a fund, for example, Fund A, that itself has an investment in another fund, for example, Fund B, which the bank identified by using either the look-through approach or the mandate-based approach, the risk weight applied to the investment of the first fund, that is, Fund A’s investment in Fund B, may be determined by using one of the three approaches set out above, provided that— |
| (i) | for all subsequent layers, that is, for example, Fund B’s investments in Fund C and so forth, the risk weights applied to the investment in Fund C may be determined in terms of the look-through approach only if the look-through approach was also used for determining the risk weight for the investment in the fund at the preceding layer, that is, the investment in Fund B; |
| (ii) | when none of the aforementioned scenarios is applicable, the bank shall apply the fall-back approach in respect of the relevant investment in the fund; |
| (E) | a bank that adopted the IRB approach for the measurement of the bank’s exposure to credit risk— |
| (i) | shall, in the case of the look-through approach, calculate the relevant IRB risk components, that is, the PD of the underlying exposures and, where applicable, the relevant LGD and EAD components, associated with the underlying exposures of the relevant fund, including, for example— |
| (aa) | any underlying exposures arising from the fund’s derivatives activities, when the underlying exposure has to be risk-weighted in terms of the provisions of these Regulations; and |
| (bb) | the associated counterparty credit risk exposure, |
as if the bank was directly exposed to such risk, provided that, instead of determining a credit valuation adjustment (CVA) requirement associated with the fund’s relevant derivatives exposures, the bank shall multiply the relevant exposure amount for counterparty credit risk with a factor of 1.5, before applying the risk weight associated with the relevant counterparty;
| (ii) | shall apply the relevant risk weights specified in the standardised approach in regulation 23(8) of these Regulations when an IRB calculation is not feasible, such as, for example, when the bank is unable to assign the necessary risk components to the relevant underlying exposures in a manner consistent with the bank’s own underwriting criteria or the bank is using the mandate-based approach, provided that, in such cases, the bank shall— |
| (aa) | in the case of equity exposures apply the simple risk weight method set out in subregulation (6)(b)(i) above; |
| (bb) | in the case of securitisation exposures— |
| (i) | apply the ratings-based approach set out in regulation 23(11)(e) of the Regulations or the Securitisation External Ratings-Based Approach (SEC-ERBA), whichever approach may be relevant from time to time; or |
| (ii) | when directed in writing by the Authority or the bank is unable to use the SEC-ERBA, apply the Securitisation Standardised Approach (SEC-SA); or |
| (iii) | apply a risk weight of 1250 per cent when the bank is unable to comply with the requirements specified for the use of the SEC-ERBA or SEC-SA; and |
| (cc) | in all other cases, apply the standardised approach for credit risk; |
| (iii) | may use the standardised approach for credit risk when applying risk weights to the underlying components of funds if the bank obtained the approval of the Authority to adopt the partial use approach in terms of the relevant provisions specified in regulation 36(3)(b)(i) of these Regulations in the case of directly held investments; |
| (iv) | may, in the case of the look-through approach, rely on third-party calculations to determine the risk weights associated with the bank’s equity investments in funds, that is, the risk weights related to the respective underlying exposures of the fund, if the bank does not have adequate data or information to perform the calculations itself, provided that, in such cases— |
| (aa) | the third party shall use the respective methods related to the respective types of exposure specified in sub-item (ii) above; and |
| (bb) | the bank shall apply a factor of 1.2 to the relevant risk weight that would otherwise apply if the exposure was held directly by the bank; |
| (b) | Look-through approach (LTA) |
When a bank is able to obtain sufficient and frequent information in respect of the underlying exposures of the relevant fund, and the said information is verified by a relevant independent third party, the bank shall adopt the look-through approach for the calculation of the bank’s relevant risk weighted exposure amount in respect of its equity investments in all types of funds held in the bank’s banking book, in terms of which approach the bank shall risk weight the fund’s underlying exposures as if the exposures were held directly by the bank, provided that—
| (i) | the aforesaid requirement related to the frequency of financial reporting of the fund means that— |
| (A) | the financial reporting of the fund is the same as or more frequently than the required reporting frequency of the bank; and |
| (B) | the granularity of the relevant financial information is sufficient to calculate the relevant corresponding risk weights; |
| (ii) | the aforesaid requirement related to the verification of the underlying exposures by a relevant independent third party— |
| (A) | means that the relevant underlying exposures of the fund is verified, for example, by a depository or a custodian bank or, where applicable, the relevant management company; but does not mean or imply that any form of external audit is required in respect of the relevant underlying exposures; |
| (iii) | the aforesaid requirement related to the risk weighting of the fund’s underlying exposures includes, for example, any underlying exposure arising from the fund’s derivatives activities, insofar as the relevant underlying exposure is otherwise required to be risk-weighted by a bank in terms of the provisions of these Regulations, and the associated counterparty credit risk exposure, as if the bank was directly exposed to such risk, provided that— |
| (A) | instead of determining a credit valuation adjustment (CVA) requirement associated with the fund’s relevant derivatives exposures, the bank shall multiply the relevant exposure amount for counterparty credit risk with a factor of 1.5, before applying the risk weight associated with the relevant counterparty; |
| (B) | the aforesaid requirement to multiply the relevant exposure amount for counterparty credit risk with a factor of 1.5 shall not apply to situations in which the CVA capital requirement does not otherwise apply, such as, for example, transactions with a central counterparty or securities financing transactions (SFTs), unless the Authority determines in writing that the bank’s CVA loss exposure arising from SFTs is material; |
| (iv) | when the bank wishes to rely on third-party calculations in order to determine the relevant risk weights associated with the bank’s equity investment in the fund, because the bank does not have adequate data or information to perform the required calculations itself, that is, the bank does not have adequate data or information itself to risk weight the relevant underlying exposures of the fund, the bank shall apply a factor of 1.2 to the applicable risk weight that would otherwise apply if the exposure was held directly by the bank. |
For example, an exposure that is subject to a risk weight of 20 per cent in terms of the Standardised Approach shall be risk weighted at 24 per cent (1.2 * 20 per cent) when the bank wishes to rely on the look through performed by a third party;
| (v) | following the calculation of the aforesaid relevant total risk weighted exposure amount in respect of the fund, the bank shall calculate the average risk weight of the fund, denoted by Avg RWfund, by dividing the relevant total risk weighted exposure amount by the total assets of the fund; |
| (vi) | following the calculation of the aforesaid relevant average risk weight of the fund the bank shall adjust upwards the average risk weight of the fund by its leverage, denoted by Lvg, for a given equity investment, through the application of the formula specified below: |
RWAinvestment = Avg RWfund * Lvg * equity investment
Provided that the ultimate effective risk weight of the bank’s investment in the fund, that is, Avg RWfund * Lvg, shall be subject to a limit of 1250 per cent.
| (c) | Mandate-based approach (MBA) |
When a bank is unable to comply with the relevant requirements specified in paragraph (b) above in relation to the look-through approach, the bank may adopt the mandate-based approach for the calculation of the bank’s relevant risk weighted exposure amount in respect of equity investments in all types of funds held in the bank’s banking book, in terms of which approach the bank shall, as a minimum, use the information contained in a fund’s mandate or in the relevant national regulations governing such investment funds, provided that—
| (i) | the aforesaid requirement to use the information contained in a fund’s mandate or in the relevant national regulations governing such investment funds does not mean or imply that the bank is restricted to use only such information, and as such the bank may, for example, also use information obtained from other relevant disclosures of the fund; |
| (ii) | in order to ensure that all relevant underlying risks are duly accounted for, including any relevant exposure to counterparty credit risk, the relevant risk weighted exposure amount in respect of the fund shall be calculated as the sum of the items envisaged in items (A) to (C) below: |
| (A) | in the case of any relevant balance sheet exposure, that is, in relation to the funds’ assets, the bank shall risk weight the said assets assuming the underlying portfolios are invested to the maximum extent allowed in terms of the fund’s mandate in those assets that are assigned the highest capital requirement, and then progressively in those other assets assigned lower capital requirements, provided that— |
| (i) | when more than one risk weight may be applied to a given exposure, the bank shall apply the relevant highest risk weight. |
For example, in the case of investments in corporate bonds with no ratings restrictions, the bank shall apply a risk weight of 150 per cent;
| (B) | when the underlying risk of a derivative exposure or an off-balance-sheet item is otherwise required to be risk weighted in terms of the provisions of these Regulations, the bank shall risk weight the relevant notional amount of the derivative position or of the off-balance sheet exposure accordingly, provided that— |
| (i) | when the relevant underlying is unknown, the bank shall use the full notional amount of the relevant derivative positions for the calculation; |
| (ii) | when the notional amount of the relevant derivative instrument is unknown, the bank shall conservatively estimate that amount, using the maximum notional amount of derivatives allowed under the relevant fund’s mandate; |
| (C) | in the case of any relevant exposure to counterparty credit risk associated with the fund’s derivative exposures, the bank shall apply the standardised approach specified in regulation 23(18) of these Regulations for the measurement of the relevant exposure to counterparty credit risk, in terms of which approach the bank shall calculate the relevant amount of counterparty credit risk (CCR) exposure related to any relevant netting set of derivatives by multiplying the relevant sum of the replacement cost and potential future exposure with an alpha factor of 1.4, provided that— |
| (i) | when the replacement cost is unknown, the bank shall conservatively calculate the relevant exposure measure for CCR by using the sum of the notional amounts of the relevant derivative instruments in the netting set as a proxy for the replacement cost, and the bank shall use a multiplier equal to 1 in the calculation of the relevant potential future exposure amount; |
| (ii) | when the potential future exposure is unknown, the bank shall calculate the relevant exposure measure as 15% of the sum of the notional values of the relevant derivative instruments in the netting set, to reflect the potential future exposure amount; |
| (iii) | when both the replacement cost and the add-on components are unknown, the bank shall calculate the relevant CCR exposure amount as: |
1.4 * (sum of relevant notional amounts in the relevant netting set + 0.15*sum of relevant notional amounts in the relevant netting set);
| (iv) | the bank shall apply the relevant risk weight associated with the counterparty to the relevant sum of the aforesaid replacement cost and potential future exposure add-on; |
| (v) | instead of determining a CVA requirement associated with the fund’s derivative exposures in accordance with the relevant requirements specified in these Regulations, the bank shall multiply the relevant exposure amount to counterparty credit risk with a factor of 1.5, before applying the aforesaid risk weight associated with the relevant counterparty, provided that the aforesaid requirement to multiply the relevant exposure amount for counterparty credit risk with a factor of 1.5 shall not apply to situations in which the CVA capital requirement does not otherwise apply, such as, for example, transactions with a central counterparty or securities financing transactions (SFTs), unless the Authority determines in writing that the bank’s CVA loss exposure arising from SFTs is material; |
| (iii) | following the calculation of the relevant risk weighted exposure amount in respect of the fund, as envisaged in subparagraph (ii) above, the bank shall calculate the average risk weight of the fund, denoted by Avg RWfund, by dividing the relevant total risk-weighted exposure amount by the total assets of the fund; |
| (iv) | following the calculation of the aforesaid relevant average risk weight of the fund the bank shall adjust upwards the average risk weight of the fund by its leverage, denoted by Lvg, for a given equity investment, by multiplying the said average risk weight of the fund with the maximum financial leverage permitted in the fund’s mandate or in the relevant national regulation governing the fund, through the application of the formula specified below: |
RWAinvestment = Avg RWfund * Lvg * equity investment
Provided that the ultimate effective risk weight of the bank’s investment in the fund, that is, Avg RWfund * Lvg, shall be subject to a limit of 1250 per cent;
| (d) | Fall-back approach (FBA) |
When neither of the aforementioned two approaches is feasible for the bank, the bank shall apply to its relevant equity investment in the fund a risk weight of 1250 per cent.
[Regulation 31(7) substituted by section 6(c) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021 - subsequent paragraphs have been renumbered]
| (8) | Instructions relating to the completion of the return are furnished with reference to certain item descriptions and line items appearing on the form BA 340, as follows: |
Line item:
| 1. | Equity, listed and unlisted |
Based on the relevant requirements specified in regulations 23(6)(j) and 23(8)(j), this item shall reflect the relevant aggregate amount of the reporting bank's equity investments other than private equity investments or investment in venture capital.
| 2. | [Regulation 31(8)(2) deleted by section 6(d) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021] |
| 4. | Publicly traded equity or listed equity |
This item shall reflect the aggregate amount of publicly traded equity instruments, which instruments are included in items 27 and 35 of the form BA 100.
| 5. | Other equity or unlisted equity |
This item shall reflect the aggregate amount of equity instruments other than publicly traded equity instruments, including any unlisted equity instrument and investments in subsidiaries and associates, which instruments are included in items 28, 36 and 39 to 41 of the form BA 100.
| 46. | Other investments in related entities |
This item shall reflect the aggregate amount of investments in subsidiaries and associates other than subsidiaries and associates reported in items 43 to 45, which subsidiaries and associates are included in the consolidation of the banking group’s accounts.
[Regulation 31(8)(line item 46 (previously 43)) substituted by section 6(e) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
