On 24 Oct 2024, the HKMA published the LAC-1 Code of Practice, clarifying its guidance on exercising discretionary powers under the LAC Rules. It establishes HK$150 billion and HK$300 billion asset thresholds for resolution strategy prioritization and LAC requirements, outlines entity classification criteria, and details adjustments to LAC ratios and debt requirements based on resolution strategies. The guidance also mandates quarterly and semi-annual disclosures and specifies non-compliance procedures under the Financial Institutions (Resolution) Ordinance.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
Increased Transparency at Heart of Hong Kong Regulatory Changes
Hong Kong has continued to maintain its status as a leading financial centre throughout 2016 and into 2017, and there have been a number of regulatory developme
Market Misconduct Tribunal: A Guide to Penalties and Other Consequences for Misuse of Insider Information
Market Misconduct Tribunal proceedings for mishandling of insider information can result in fines and disgorgement orders
SPOTLIGHT ON
FAMILY OFFICES
Introduction and Purpose
On 24 Oct 2024, the Hong Kong Monetary Authority (HKMA) published the Code of Practice: Resolution Planning - LAC Requirements (LAC-1), providing guidance on the exercise of its discretionary powers under the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements — Banking Sector) Rules (LAC Rules). The guidance clarifies the HKMA's approach to resolution planning, including entity classification, LAC requirement calibration, and disclosure obligations, while emphasizing that it supplements but does not replace the LAC Rules.
Thresholds for Resolution Planning and LAC Requirements
The HKMA established thresholds for prioritizing resolution planning and imposing LAC requirements: entities with total consolidated assets exceeding HK$150 billion are prioritized for resolution strategy development, while those exceeding HK$300 billion are subject to LAC requirements. The HKMA's planning assumption is that entities below HK$300 billion will not be subject to LAC requirements, balancing systemic risk mitigation against regulatory burden for smaller institutions.
Classification of Resolution Entities and Material Subsidiaries
Resolution entities are classified where a preferred resolution strategy contemplates stabilization options (e.g., bail-in for larger institutions), while material subsidiaries are classified if they meet specific criteria (e.g., >5% of resolution group risk-weighted assets) and are not resolution entities. The HKMA presumes all Hong Kong-incorporated institutions with assets above HK$300 billion are material to critical financial functions and should be classified as material subsidiaries.
Adjustments to LAC Ratios and Minimum Debt Requirements
The HKMA may vary capital and resolution component ratios (rules 18, 19, 25) based on resolution strategies. For instance, resolution component ratios may be reduced (up to 50%) for entities with transfer-based strategies (partial property transfer or whole bank transfer), but not for D-SIBs. The minimum LAC debt requirement (one-third of LAC requirements) may be reduced below one-third (rule 35) for entities facing implementation challenges, subject to prudential assessment.
Disclosure Requirements
The LAC Rules mandate quarterly disclosures on loss-absorbing capacity (rule 47) and semi-annual disclosures on composition, creditor ranking (rules 48-50), and instrument features (rule 51). The HKMA will specify standard templates aligned with Basel Committee frameworks, requiring resolution entities and material subsidiaries to disclose consolidated loss-absorbing capacity and creditor hierarchies.
Non-Compliance and Remedial Actions
Entities must notify the HKMA of failure or likely failure to comply (rule 60) and take remedial action (rule 61) within specified periods. Failure to comply constitutes an offence under the Financial Institutions (Resolution) Ordinance, with officers potentially liable for offences under section 19(6). The HKMA will discuss remediation plans before requiring action, ensuring practical implementation.
View the full article:Source
