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July 25, 2018

HKMA released the consultation conclusion on the public consultation related to rules prescribing loss-absorbing capacity (LAC) requirements for authorized institutions. The rules were proposed to be made as subsidiary legislation under section 19(1) of the Financial Institutions (Resolution) Ordinance (Cap. 628).

The core of the HKMA’s LAC policy proposal is that authorized institutions whose failure could pose a risk to the financial system in Hong Kong should be required to have sufficient LAC to facilitate the orderly failure of such entities, should they reach the point of non-viability. To this end, requiring authorized institutions to maintain sufficient LAC is a pre-requisite to enabling the Monetary Authority, as resolution authority for the banking sector, to use the powers under the resolution regime established by the Ordinance to manage any future failure of an authorized institution in an orderly manner that avoids disruption to financial stability and minimizes the risk to public funds.

At the end of the consultation period (January 17, 2018 to March 16, 2018), 10 submissions had been received, including from industry associations (both domestic and international), authorized institutions, and financial market infrastructures. Respondents provided constructive comments on the proposals set out in the consultation paper. While some sought additional clarity on the details of the proposals, no respondents challenged the basic principle of the policy proposal. HKMA has carefully reviewed all comments and its responses are set out in the consultation conclusion, with appropriate changes adopted in developing the draft rules. The intention is to consult industry on the text of the draft rules before introducing the rules as subsidiary legislation under the Ordinance into the Legislative Council for negative vetting later in 2018. The Ordinance was enacted by the Legislative Council on June 22, 2016. The main provisions of the Ordinance came into operation on July 07, 2017.

Keywords: Asia Pacific, Hong Kong, Banking, Loss Absorbing Capacity, Resolution Regime, Consultation Conclusions, HKMA

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