The HKMA Contractual Stay Rules Explained: What You Need to Know
The Hong Kong Monetary Authority (HKMA) issued its Contractual Stay Rules in December 2020 to strengthen the resilience of the banking system in Hong Kong. These rules require banks to incorporate new provisions in material contracts that will enable them to maintain critical functions and services during a resolution process. In this article, we will explain the HKMA Contractual Stay Rules and provide insights on how they impact the banking sector in Hong Kong.
What are the HKMA Contractual Stay Rules?
The HKMA Contractual Stay Rules require banks to include certain clauses in their material contracts that will enable the bank to maintain critical functions and services during a resolution process. The provisions should allow the bank to suspend or modify its obligations under the contract in the event of a resolution process by the HKMA. The rules apply to all licensed banks incorporated in Hong Kong, including branches of overseas banks.
Why were the HKMA Contractual Stay Rules implemented?
The HKMA Contractual Stay Rules aim to strengthen the resilience of the banking system in Hong Kong and ensure that banks can continue to provide critical services and functions during a resolution process. The rules are in line with international standards, such as the Financial Stability Board`s Key Attributes of Effective Resolution Regimes for Financial Institutions, which require banks to have adequate provisions in their contracts to maintain critical functions during a resolution process.
What are the key provisions of the HKMA Contractual Stay Rules?
The HKMA Contractual Stay Rules require banks to include provisions in their material contracts that will allow them to suspend or modify their obligations during a resolution process. These provisions should ensure that the bank can continue to provide critical functions and services, such as payment and settlement services, clearing and custody services, and access to collateral, among others. The rules also require banks to notify the HKMA and affected counterparties when the contractual stay is triggered.
How will the HKMA Contractual Stay Rules impact the banking sector in Hong Kong?
The HKMA Contractual Stay Rules will require banks to review and amend their material contracts to ensure compliance with the new provisions. This process will require a significant effort from banks, as they will need to identify the contracts that are subject to the rules, review the provisions and ensure that they comply with the new requirements. However, the rules will provide greater certainty to counterparties in the event of a resolution process, as they will know that the bank will be able to continue to provide critical services and functions.
Conclusion
The HKMA Contractual Stay Rules aim to strengthen the resilience of the banking system in Hong Kong by requiring banks to include provisions in their material contracts that will enable them to maintain critical functions and services during a resolution process. While the rules will require a significant effort from banks to ensure compliance, they will provide greater certainty to counterparties in the event of a resolution process. As the banking sector in Hong Kong continues to evolve, it is essential that banks remain vigilant and take a proactive approach to ensure compliance with regulatory requirements to strengthen the resilience of the financial system.
