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RegTalks: So what about the HKMA Contractual Stays?
52 Plays2 years ago
Following the announcement of the Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights—Banking Sector) Rules, all counterparties with existing non-Hong Kong law financial contracts embedded with an early termination right must ensure they are compliant with these rules before the regulatory deadline of February 2024 - by adhering to the Hong Kong Jurisdictional Module found on the ISDA website, signing an Omnibus Amendment Agreement or bilaterally amending their contracts.
Listen as Navin Desor, Head of Legal, Markets and Securities Services, HSBC, Asia-Pacific and Deborah Hajasi, Head of Markets Regulatory Change, HSBC, Asia-Pacific take a look with Michael Small, Project Manager, Transformation, Markets and Securities Services, HSBC, at the ‘what’, ‘why’, ‘when’, ‘who’, ’how’ and ‘what-if’ of the Stay Rules.
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Transcript
Introduction to RegTalks and Global Insights
00:00:02
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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.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes.
00:00:16
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Thanks for listening, and now onto today's show.
Discussion on Hong Kong's Contractual State Rules
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Welcome to the latest in our RegTalks podcast series.
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We are featuring a variety of different topics that are currently trending in regulation, and we now discuss the Hong Kong contractual state rules.
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Introducing the topic is Mike Small, Project Manager for HSBC's implementation of the state rules in HSBC's market transformation team.
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Mike, over to you.
Exploring HKMA State Rules with Guests
00:00:52
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Welcome to this podcast where we discuss the HKMA state rules
00:00:56
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We will look at the what, why, when, who, how, and what if of the HKMA stay rules.
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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.
00:01:16
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Navin, if I could turn to you first, what are the Hong Kong Monetary Authority or HKMA stay rules?
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Thank you, Mike.
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Very briefly,
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These are the MA's rules on the contractual recognition of the suspension of termination rights in a resolution scenario of a substantial bank.
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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.
Purpose and Global Context of HKMA Rules
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Why is the HKMA doing this?
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What benefits does state rules bring?
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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.
00:02:16
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There are generic benefits to market participants as a whole in that it provides stability and audienliness to the resolution.
00:02:25
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If I can bring you in here, Deborah, would you like to add anything on this point?
00:02:29
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I would say it is also important to call out that it is not only HKMA that's regulating this.
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There are other jurisdictions that have implemented contractual stay rules, including, for example, UK, EU, US and Japan.
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Canada has just gone live for the first wave in October and Singapore is closing the implementation period next year.
00:02:53
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It is part of that G20 agenda to defend a policy to enhance legal certainty in a cross-border resolution scenario.
Implementation Challenges and Solutions
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And how is the HKMA able to do this in a resolution scenario?
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HKMA, as the resolution authority, has the power to exercise a temporary stay on termination rights under Hong Kong law.
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However, where a contract is governed by non-Hong Kong law,
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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.
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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.
00:03:45
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If I'm the client's
00:03:46
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I might not be familiar with the clause, and I may be unclear how the clause will apply to my contract.
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Can you help to explain this a little bit?
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The clause only applies in a limited set of circumstances in a resolution scenario declared by the MA.
00:04:01
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It is only a stay on termination right, a temporary 48-hour suspension of those rights.
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After the stay period has expired, you can terminate your transactions if you so choose.
00:04:14
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It is a standard clause aimed to reduce systemic risk and does not apply in a normal course of business environment.
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It follows the approach that has been taken in other jurisdictions.
International Comparisons and HSBC's Compliance
00:04:26
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Deborah mentioned that other jurisdictions have either implemented or are looking to implement the same rules.
00:04:32
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Are the rules largely the same?
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And why may some clients not have seen this from their UK banks or US banks?
00:04:39
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The rules are largely the same as the intention is the same.
00:04:43
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The main difference, however, is HKMA contractual stay can also apply to FX spot products.
00:04:50
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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,
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the resolution authority already has the power to exercise temporary stay, which will be binding on the counterparty.
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Here in HSBC Hong Kong, the majority of our contracts are not governed by Hong Kong law.
00:05:19
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Hence, we need to do the outreach and contract amendment.
00:05:23
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And so the outcome is the same?
00:05:25
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Yes, it is.
00:05:27
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And Navin, one final question for you.
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In your previous answer, you mentioned the HKMA and Hong Kong law.
00:05:33
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If I'm a client outside of Hong Kong,
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Why does this affect me?
00:05:38
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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.
00:05:50
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We are required to implement these amendments in time, and if we cannot, we are expected to suspend trading.
00:05:57
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Thanks, Navin.
00:05:58
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Deborah, if I can turn to you, you oversee the regulatory change team supporting the markets business in HSBC in Asia.
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there must be a large volume of agreements to repaper.
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Can you give information to the listeners on how HSBC is responding to this rule and also what clients are impacted by this?
00:06:17
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Yes, this I would say is the largest amount of agreements that we have to repaper from a regulatory requirement perspective.
00:06:25
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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
00:06:36
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We have set up a project team since 2021 to look at this.
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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.
Affected Contracts and Compliance Strategies
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And what sort of contracts are we speaking about here?
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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.
00:07:16
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These can also go into our long-form confirmation, which some of our clients are also using.
00:07:21
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And how does a client adhere to the stay rules?
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If I'm a client with one or more of these agreements, do I need to repaper all of those agreements?
00:07:32
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No.
00:07:33
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There is no need to repaper each agreement.
00:07:36
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There are two more efficient methods of doing so.
00:07:39
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Firstly, there is the Hong Kong Jurisdictional Module under the ISDA Resolution Stay Jurisdictional Modular Protocol.
00:07:48
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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.
00:07:58
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You can adhere to this on the ISDA website, a link to which is included in the material sent with this podcast.
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Do note that there is a one-time fee of US$500
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payable to ISDA, not payable to HSBC, we're using this protocol.
00:08:15
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The other method is to sign an omnibus amendment agreement, or OAA as we call it.
00:08:22
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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.
00:08:33
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A client just needs to have an authorized signatory sign the agreement
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and return it back to our outreach team.
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And of course, a client can also choose to bilaterally amend.
00:08:45
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And when does this need to be done by?
Importance of Compliance and HSBC's Support
00:08:47
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The implementation for this final phase is due on 27th of February, 2024.
00:08:52
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Thanks, Navin.
00:08:55
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Deborah, does that mean that clients will need to sign the OAA or adhere by the 27th of February?
00:09:02
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That's the regulatory deadline date.
00:09:05
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We do ask all of our clients to look at this as soon as possible to avoid any confusion.
00:09:11
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And there is no opt-out to this?
00:09:13
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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.
00:09:23
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So we do ask all of our clients to work with us to include the temporary stay clause in the relevant contracts.
00:09:30
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And what happens if I do not adhere?
00:09:34
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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.
00:09:43
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It will limit our ability to enter into new trades if the impacted master agreements have not been remediated.
00:09:50
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Okay, thanks, Deborah.
00:09:52
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Any final words to our clients listening?
00:09:55
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I understand from a client perspective, this can be an effort for them to do so.
00:10:00
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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.
00:10:10
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I would ask clients to look into this as soon as they can.
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And remember that HSBC team is here to help them.
00:10:17
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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.
Conclusion and Future Episodes
00:10:27
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Thanks, Deborah and Levin.
00:10:28
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Gabriella, back to you.
00:10:31
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Thanks so much, Mike, Deborah, and Navin.
00:10:33
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This has also been really interesting for me.
00:10:36
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I would like to thank you for listening to this edition in our series of RegTalks podcasts.
00:10:41
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We hope that you enjoyed learning more about the HQMA stay rules.
00:10:46
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Please stay tuned to our podcasts as we explore more themes in the coming weeks.
00:10:51
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Thank you for joining us at HSBC Global Viewpoint.
00:10:55
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.