Investor Presentaiton

MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk (continued) Interest rate risk Interest rate risk is defined by HKFRS 7 as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is primarily exposed to interest rate risk under this definition as a result of changes in the future cash flows of deposits and loans, bank balance, changes in the fair value of fixed rate debt investments categorised as FVOCI, and the interest rate swap hedges. The Company measures and reports Interest rate risk in the banking book (IRRBB) using the new standardised framework through MA(BS)12A - Interest Rate Risk in the Banking Book in accordance with HKMA requirements. The Company measures its IRRBB exposures mainly through the Economic Value of Equity (EVE) and Net Interest Income (NII). These are calculated weekly for internal risk management purposes, as well as monthly as part of the monthly closing process. The Company's interest rate risk is managed by the Treasury Department. The asset and liability structure is actively managed to ensure the Company does not assume excessive interest rate risk relative to its overall development strategy and commensurate with the scale, nature and complexity of its business. The Company may also enter into additional hedges such as interest rate swaps from time to time. The ALCO is responsible for ensuring that these objectives are met on an ongoing basis. Independent market risk management oversight is provided by Market Risk Department (MRD). MRD identifies market risks including IRRBB, and develops and employs risk measures and tools to monitor, control and mitigate those risks. MRD also monitors risk exposures against established limits, and produces and distributes comprehensive reports designed to keep senior management apprised of the Company's market risk and IRRBB exposures. The Company's Market Risk Management Policy sets forth principles and practices for sound management of its market risk. The policy has been established to evidence the Company's standards for independent identification, measurement, monitoring, reporting, challenge, and escalation of market risk arising from the Company's business activities. The Company's interest rate risk is controlled through conservative risk limits approved by the Board or its delegated Risk Committees including the Board Risk Committee, the Bank Risk Committee and the Credit and Market Risk Committee. The Company has clearly defined EVE and NII limits in place, in addition to other sensitivity and notional based risk limits. These limits are set by taking into account the size of the Company's balance sheet, projected business growth and risk appetite as set by the Board. Exposure is monitored at least weekly for EVE and NII limits, and daily for sensitivity and notional based limits. These are reported back to the Risk Committees on a monthly and quarterly basis. The Company applies the model assumptions for IRRBB prescribed by the HKMA with no deviations. The models used are reviewed on an annual basis at a minimum and independently verified by the Morgan Stanley Group's Model Risk Management (MRM) group. The standardised EVE risk measure is calculated according to the six shock scenarios defined in the HKMA SPM IR-1. For the calculation of the change in NII, in addition to the two shock scenarios defined in SPM IR-1 for parallel up and parallel down interest rate moves, the Company also calculates a range of internal shock scenarios covering non-parallel interest rate moves combined with different repricing assumptions for customer deposits. The net gain or loss in the income statement resulted from the application of a parallel shift in market interest rates increase or decrease to these positions is disclosed in the Template IRRBB1: Quantitative information on interest rate risk in banking book as part of the Company's Pillar 3 disclosures under section H of the unaudited supplementary financial information. 46 46

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