On 06 Dec 2024, the HKMA approved amendments to the Banking (Liquidity Coverage Ratio — Calculation of Total Net Cash Outflows) Code, effective 1 January 2025, to standardize LCR calculations for Category 1 institutions. The code specifies detailed outflow rates (0–100%) for 24 funding categories and inflow rates (0–100%) for 7 cash inflow types, with collateral quality and contractual terms determining applicable rates under the LCR framework.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 06 Dec 2024, the Hong Kong Monetary Authority (HKMA) approved amendments to the Banking (Liquidity Coverage Ratio — Calculation of Total Net Cash Outflows) Code, effective 1 January 2025, to provide updated guidance on calculating total expected cash outflows and inflows under the Liquidity Coverage Ratio (LCR) framework for Category 1 institutions.
Key Methodology Changes
The amended code replaces the previous guidance with a structured framework for calculating total expected cash outflows and inflows. It specifies distinct outflow rates (ranging from 0% to 100%) for 24 categories of funding sources, including stable retail deposits (5% or 3% under specific conditions), less stable retail deposits (10%), retail term deposits (5% or 100% if repayment restriction does not apply), and unsecured wholesale funding (40% or 100%). Operational deposits require strict adherence to criteria under Clause 7 to qualify for reduced outflow rates (20% or 25%).
Outflow Rate Framework
The code establishes standardized outflow rates for secured funding transactions (Table 1), securities swap transactions (Table 2), and derivative contracts (Clause 12), with rates dependent on collateral quality (e.g., 0% for level 1 assets, 100% for non-qualifying assets). It mandates a 100% outflow rate for structured financial instruments (Clause 19), embedded options in structured financing (Clause 20), and undrawn committed facilities (Table 3), with exceptions for collateralized facilities meeting specific criteria under Clause 21.
Inflow Rate Framework
For cash inflows, the code specifies inflow rates (0% to 100%) under Clauses 25–31, including secured lending transactions (Table 5), loans (Table 7), and derivative contracts (Clause 30). Key provisions include 0% inflow rates for revolving loans (Table 7), 100% for maturing securities not in HQLA (Clause 28), and 0% for undrawn facilities from other financial institutions (Clause 29). Derivative contracts require netting under valid bilateral agreements (Clause 30(4)), with adjustments for collateral quality (Clause 30(2)).
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