Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: Welcome to the latest in our RegTalks podcast series.
Speaker: We are featuring a variety of different topics that are currently trending in regulation, and we now discuss the Hong Kong contractual state rules.
Speaker: Introducing the topic is Mike Small, Project Manager for HSBC's implementation of the state rules in HSBC's market transformation team.
Speaker: Mike, over to you.
Speaker: Welcome to this podcast where we discuss the HKMA state rules
Speaker: We will look at the what, why, when, who, how, and what if of the HKMA stay rules.
Speaker: I'm joined by Navin Desor, the Asia-Pacific Head of Markets and Security Services Legal, based in HSBC Hong Kong, and Deborah Hajati, who heads up the Regulatory Change Team for the markets business here in Asia-Pacific at HSBC.
Speaker: Navin, if I could turn to you first, what are the Hong Kong Monetary Authority or HKMA stay rules?
Speaker: Thank you, Mike.
Speaker: Very briefly,
Speaker: These are the MA's rules on the contractual recognition of the suspension of termination rights in a resolution scenario of a substantial bank.
Speaker: In the case of a financial institution becoming financially non-viable, these rules grant the resolution authorities power to temporarily, and let me stress temporarily, suspend the termination rights of counterparties for 48 hours.
Speaker: Why is the HKMA doing this?
Speaker: What benefits does state rules bring?
Speaker: So the aim is to provide financial market stability, to allow time for resolution authorities to effectively assess resolution options and to prevent a disorderly termination of contracts on a mass scale, which could potentially lead to much wider market contagion, as was seen during the 2008 financial crisis.
Speaker: There are generic benefits to market participants as a whole in that it provides stability and audienliness to the resolution.
Speaker: If I can bring you in here, Deborah, would you like to add anything on this point?
Speaker: I would say it is also important to call out that it is not only HKMA that's regulating this.
Speaker: There are other jurisdictions that have implemented contractual stay rules, including, for example, UK, EU, US and Japan.
Speaker: Canada has just gone live for the first wave in October and Singapore is closing the implementation period next year.
Speaker: It is part of that G20 agenda to defend a policy to enhance legal certainty in a cross-border resolution scenario.
Speaker: And how is the HKMA able to do this in a resolution scenario?
Speaker: HKMA, as the resolution authority, has the power to exercise a temporary stay on termination rights under Hong Kong law.
Speaker: However, where a contract is governed by non-Hong Kong law,
Speaker: there is uncertainty as to whether a court in a non-Hong Kong jurisdiction would give effect to a stay and termination right imposed by the HKMA.
Speaker: Hence, there is a need to amend those existing non-Hong Kong law contracts with early termination rights between the financial institution and its counterparties so that contractually they are subject to the Hong Kong stay rules.
Speaker: If I'm the client's
Speaker: I might not be familiar with the clause, and I may be unclear how the clause will apply to my contract.
Speaker: Can you help to explain this a little bit?
Speaker: The clause only applies in a limited set of circumstances in a resolution scenario declared by the MA.
Speaker: It is only a stay on termination right, a temporary 48-hour suspension of those rights.
Speaker: After the stay period has expired, you can terminate your transactions if you so choose.
Speaker: It is a standard clause aimed to reduce systemic risk and does not apply in a normal course of business environment.
Speaker: It follows the approach that has been taken in other jurisdictions.
Speaker: Deborah mentioned that other jurisdictions have either implemented or are looking to implement the same rules.
Speaker: Are the rules largely the same?
Speaker: And why may some clients not have seen this from their UK banks or US banks?
Speaker: The rules are largely the same as the intention is the same.
Speaker: The main difference, however, is HKMA contractual stay can also apply to FX spot products.
Speaker: And why some clients may not have seen the same outreach from, say, their UK banks, as an example, that is because if it is a local law-governed contract, so in this example of a UK bank, an English law contract,
Speaker: the resolution authority already has the power to exercise temporary stay, which will be binding on the counterparty.
Speaker: Here in HSBC Hong Kong, the majority of our contracts are not governed by Hong Kong law.
Speaker: Hence, we need to do the outreach and contract amendment.
Speaker: And so the outcome is the same?
Speaker: Yes, it is.
Speaker: And Navin, one final question for you.
Speaker: In your previous answer, you mentioned the HKMA and Hong Kong law.
Speaker: If I'm a client outside of Hong Kong,
Speaker: Why does this affect me?
Speaker: Most of the HSBC offices in the Asia-Pacific region are branches of the Hong Kong and Shanghai Banking Corporation in Hong Kong, so are an extension of the same legal entity.
Speaker: We are required to implement these amendments in time, and if we cannot, we are expected to suspend trading.
Speaker: Thanks, Navin.
Speaker: Deborah, if I can turn to you, you oversee the regulatory change team supporting the markets business in HSBC in Asia.
Speaker: there must be a large volume of agreements to repaper.
Speaker: Can you give information to the listeners on how HSBC is responding to this rule and also what clients are impacted by this?
Speaker: Yes, this I would say is the largest amount of agreements that we have to repaper from a regulatory requirement perspective.
Speaker: Any clients that have an existing non-Hong Kong law financial contract embedded with an early termination right will need to incorporate the temporary stay proficient
Speaker: We have set up a project team since 2021 to look at this.
Speaker: From early part of last year, we have incorporated the state provision as a standard clause in the in-scope contracts and have completed contractual amendment with over 200 entities that are GSIPS or an authorized institution in Hong Kong that had the compliance deadline of August 2023.
Speaker: And what sort of contracts are we speaking about here?
Speaker: For us, they are typically Eastern Master Agreements, GIMRAR and GIMSLA, which are industry standard financial contracts we use to cover our derivatives product, repo and security lending products.
Speaker: These can also go into our long-form confirmation, which some of our clients are also using.
Speaker: And how does a client adhere to the stay rules?
Speaker: If I'm a client with one or more of these agreements, do I need to repaper all of those agreements?
Speaker: No.
Speaker: There is no need to repaper each agreement.
Speaker: There are two more efficient methods of doing so.
Speaker: Firstly, there is the Hong Kong Jurisdictional Module under the ISDA Resolution Stay Jurisdictional Modular Protocol.
Speaker: This has been developed by ISDA to enable firms to cover any amendment of the terms of pre-existing contracts to bring them in line with stay rules.
Speaker: You can adhere to this on the ISDA website, a link to which is included in the material sent with this podcast.
Speaker: Do note that there is a one-time fee of US$500
Speaker: payable to ISDA, not payable to HSBC, we're using this protocol.
Speaker: The other method is to sign an omnibus amendment agreement, or OAA as we call it.
Speaker: This has been developed by HSBC Legal in conjunction with external legal counsel and is a single document that applies stay terms to all pre-existing contracts.
Speaker: A client just needs to have an authorized signatory sign the agreement
Speaker: and return it back to our outreach team.
Speaker: And of course, a client can also choose to bilaterally amend.
Speaker: And when does this need to be done by?
Speaker: The implementation for this final phase is due on 27th of February, 2024.
Speaker: Thanks, Navin.
Speaker: Deborah, does that mean that clients will need to sign the OAA or adhere by the 27th of February?
Speaker: That's the regulatory deadline date.
Speaker: We do ask all of our clients to look at this as soon as possible to avoid any confusion.
Speaker: And there is no opt-out to this?
Speaker: If we look at the purpose of this rule and the reasons why regulators are implementing them, it is to provide market stability in the event of a resolution scenario.
Speaker: So we do ask all of our clients to work with us to include the temporary stay clause in the relevant contracts.
Speaker: And what happens if I do not adhere?
Speaker: It will have an impact on our trading relationship as HSBC has a regulatory obligation to ensure that all of our relevant contracts are state compliant.
Speaker: It will limit our ability to enter into new trades if the impacted master agreements have not been remediated.
Speaker: Okay, thanks, Deborah.
Speaker: Any final words to our clients listening?
Speaker: I understand from a client perspective, this can be an effort for them to do so.
Speaker: What I would say is that these are industry standard clauses that have been produced by ISTA and consistent with many other jurisdictions that have implemented this.
Speaker: I would ask clients to look into this as soon as they can.
Speaker: And remember that HSBC team is here to help them.
Speaker: And that if they have any further questions, please contact the outreach team or the normal contacts at HSBC and we will do everything we can to help.
Speaker: Thanks, Deborah and Levin.
Speaker: Gabriella, back to you.
Speaker: Thanks so much, Mike, Deborah, and Navin.
Speaker: This has also been really interesting for me.
Speaker: I would like to thank you for listening to this edition in our series of RegTalks podcasts.
Speaker: We hope that you enjoyed learning more about the HQMA stay rules.
Speaker: Please stay tuned to our podcasts as we explore more themes in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
