CR-G-7 Collateral and Guarantees

Introduction and Scope

On 11 Apr 2025, the HKMA issued the updated Supervisory Policy Manual module CR-G-7 V.2 'Collateral and Guarantees', superseding the previous version dated 29.06.01. The guidance provides comprehensive requirements for Authorized Institutions (Als) on credit risk mitigation through collateral and guarantees, applicable to all credit exposures including margin lending, lending commitments, and contingent liabilities. It explicitly clarifies that this non-statutory guidance does not replace existing statutory requirements under the Banking Ordinance (e.g., Banking (Capital) Rules eligibility criteria) but must be applied alongside specific supervisory guidance where conflicts arise.

Key Regulatory Requirements

The updated guidance mandates Als to establish written CRM management policies approved by their Board or Credit Committee, covering delegation of authorities, acceptable CRM types (with statutory compliance considerations), and risk management procedures. It specifies that Als must set maximum loan-to-value ratios, minimum margin levels, and haircuts commensurate with collateral volatility, currency mismatch, and liquidity risk, with particular emphasis on conservative haircuts for volatile assets. For valuation, Als must adopt methodologies reflecting current market conditions, exclude future price appreciation, and incorporate climate risk considerations (e.g., weather hazards) where relevant, with revaluation frequencies varying by collateral type (e.g., daily for securities, quarterly for immovable properties in stable markets).

Eligibility and Validity Standards

The guidance strictly prohibits reliance on collateral or guarantees with material positive correlation between the obligor's credit quality and the CRM (e.g., collateral from the obligor's group entities without independent credit assessment). For guarantees, Als must ensure enforceability through binding written documentation, assess the credit protection provider's financial strength rigorously, and exclude clauses allowing unilateral reduction of credit protection or delaying payments. Validity requirements include verifying title ownership, ensuring legal enforceability across all relevant jurisdictions, and confirming compliance with laws (e.g., concentration limits under Banking (Exposure Limits) Rules).

Risk Management and Reporting

Als must implement robust procedures to monitor CRM quality, including regular evaluation of collateral value and credit protection provider strength, with prompt action for deteriorating CRM (e.g., requiring additional collateral or adjusting credit terms). The guidance mandates stress-testing CRM portfolios under adverse scenarios (e.g., property price declines, insolvency of financial institutions) and specifies detailed management information system requirements for real-time tracking of collateral valuation, LTV ratios, revaluation dates, and recovery rates. Safe custody controls for physical/digital collateral and CRM documents must be enforced with dual control, regular physical checks, and independent reconciliation for custodied assets.