On 26 Sep 2024, the HKMA revised SPM module CR-G-9 to clarify regulatory requirements for controlling exposures to connected parties under Part 8 of the Banking Ordinance, reinforcing statutory limits (15% ACPE ratio, 5% ACNPE ratio, HK$10 million ASCP cap) and mandating robust systems for identification, monitoring, and reporting. The update introduces 'Specified Exposures' for private banking, requires arm's length terms for all connected party transactions, and specifies capital treatment for exposures to connected entities under the BCR.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction and Purpose
On 26 Sep 2024, the Hong Kong Monetary Authority (HKMA) published revised Supervisory Policy Manual (SPM) module CR-G-9, 'Exposures to Connected Parties', superseding previous versions (V.1 to V.3) to clarify regulatory requirements for locally incorporated Authorised Institutions (Als) regarding statutory limits on exposures to connected parties under Part 8 of the Banking Ordinance. The module specifies systems and controls required for identifying, measuring, monitoring, and controlling such exposures, emphasizing adherence to arm's length principles and robust risk management.
Statutory Limits and Scope
The revised module reinforces statutory limits under Rule 87: (a) aggregate connected parties exposure ratio (ACPE ratio) must not exceed 15% of Tier 1 capital; (b) aggregate connected natural persons exposure ratio (ACNPE ratio) must not exceed 5%; and (c) aggregate single connected party exposure (ASCP) to any connected natural person must not exceed HK$10 million. Only CRM-uncovered portions of exposures are subject to these limits. The scope explicitly covers connected parties defined under Rule 85(1), including directors, employees, controllers, minority shareholders, and entities controlled by connected natural persons (per Rule 94(2)).
Key Regulatory Requirements
Als must implement controls including: (i) Board oversight for policy approval and regular review of exposures; (ii) Policies covering categories of connected parties (extending beyond Rule 85(1) to include senior management, subsidiaries, and entities with conflicts of interest); (iii) Monitoring systems to identify new connected parties and ensure compliance; (iv) Prohibition on more favourable terms for connected parties versus non-connected parties; and (v) Reporting breaches of statutory limits to the HKMA as notifiable events. The module introduces 'Specified Exposures' for private banking (Section 3.4), allowing flexibility if exposures meet criteria for being fully secured, arm's length, and commercially justified.
Capital Treatment and Reporting
Under Section 4.3, loans to connected commercial entities must be deducted from CET1 capital under the Banking (Capital) Rules (BCR), while exposures to financial sector entities require demonstration of ordinary course business use. Als must ensure accurate regulatory reporting via 'Return of Large Exposures' and 'Certificate of Compliance', with breaches reported immediately. The module mandates independent review controls to verify exposures were incurred in the ordinary course of business, with HKMA retaining supervisory review authority over these controls.
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