On 13 Dec 2024, the HKMA updated CR-L-4 to clarify underwriting exposure rules under the BELR, repealing the prior exemption that allowed underwriting commitments to be excluded from statutory limits. The revised guidance mandates Als to monitor underwriting exposures against Part 7 limits (25% of Tier 1 capital) and restricts the seven-working day equity exposure exemption period, with extensions permitted only for exceptional circumstances.
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Introduction
On 13 Dec 2024, the Hong Kong Monetary Authority (HKMA) issued a revised Supervisory Policy Manual module (CR-L-4) providing updated guidance on the underwriting of securities by locally incorporated Authorized Institutions (Als) under the Banking (Exposure Limits) Rules (BELR), superseding previous versions dated 1991, 2001, and 2019.
Scope and Application
The guidance applies to Als engaging in underwriting or subunderwriting activities that create contractual commitments to purchase securities only if end-investors or subunderwriters fail to do so. It explicitly excludes 'bought deals' (where Als acquire securities as principals for resale) and 'block trades' in the secondary market, which fall under standard Part 7 BELR exposure limits.
Regulatory Policy Requirements
Als must establish a board-approved underwriting policy covering approved transaction types, individual/aggregate limits (accounting for existing exposures), subunderwriting arrangements, and disposal mechanisms to avoid breaching statutory concentration limits. Maximum underwriting commitments must reflect security types, issuer credit risk, underwriting expertise, disposal capabilities, and risk controls, with monitoring based on aggregate issuer commitments.
Statutory Exposure Limits
The HKMA has repealed the previous local exemption (rule 48(1)(f)) under the BELR, requiring Als to monitor underwriting exposures against Part 7 limits (25% of Tier 1 capital for single counterparty/group). Equity exposure (Part 2) and share capital acquisition limits (Part 3) now apply to underwriting holdings without the prior exemption, though a seven-working day exemption period remains for equity exposure calculation under rules 14(1)(c) and 23(2)(a)(ii).
Exemption Period and Extensions
The seven-working day exemption period for equity exposure calculation commences upon securities acquisition. Extensions beyond seven days are permitted only for exceptional circumstances (e.g., unanticipated operational disruption, extreme market conditions preventing fair-value disposal) and are typically limited to three months, subject to HKMA approval.
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