HKMA issued a circular on liquidity measures that HKMA has taken or plans to take in response to COVID-19 outbreak. These measures encompass three aspects—the liquidity facilities framework of HKMA, supervisory expectations on the use of liquidity buffers under the liquidity coverage ratio (LCR) and liquidity maintenance ratio regimes, and the temporary FIMA Repo Facility of FED.
Liquidity Facilities Framework
With regard to the Standby Liquidity Facilities within the Framework, HKMA provided greater clarity about the operational parameters of the facilities as follows:
- While funding under the Standby Liquidity Facilities is normally provided for a term of up to one month, HKMA is prepared to consider automatically rolling it over for additional term(s) to meet the longer-term funding requirement of individual authorized institutions.
- HKMA will set the prices for Standby Liquidity Facilities at levels that would help reduce market volatility.
- There is a wide scope of assets eligible for being used as collateral for term repo under the Standby Liquidity Facilities, which are not confined to High-Quality Liquid Assets (HQLA) as defined under the Banking (Liquidity) Rules (BLR).
Detailed clarifications can be found in the Annex to the circular. Authorized institutions should, as a matter of priority, put in place internal policies and procedures for using the liquidity facilities of HKMA, especially the Standby Liquidity Facilities. To ascertain compliance with this supervisory expectation for operational readiness, the Monetary Operations Division of HKMA will reach out to individual authorized institutions for conducting drills on accessing the Standby Liquidity Facilities.
Utilization of liquidity buffers under HKMA regimes
Since the regulatory liquidity framework was enhanced in 2015, authorized institutions have built up stocks of liquid assets under the LCR and the liquidity maintenance ratio regimes. HKMA reminded authorized institutions that these assets are designed as a buffer to meet liquidity demand during times of financial stress. In light of the prevailing uncertainties brought about by the COVID-19 outbreak, authorized institutions can utilize their liquidity buffers to meet their liquidity demand and support business activities. Consequently, HKMA will accept an authorized institution operating temporarily with a lower level of liquidity ratio. Authorized institutions should, however, ensure that the flexibility embedded in the regulatory liquidity framework is integrated into their relevant internal processes and that they can efficiently utilize the liquidity buffers when there is a need to do so. HKMA will reach out to individual authorized institutions to understand their internal processes in this regard.
Temporary FIMA Repo Facility of FED
FED announced, on March 31, 2020, the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility). HKMA, as one of the FIMA account holders, may enter into repurchase agreements with FED and temporarily exchange the US Treasury instruments held by HKMA for US dollars, which can then be made available to authorized institutions in Hong Kong. The FIMA Repo Facility will last for at least six months, starting from April 06, 2020. HKMA is in discussion with FED to clarify the operational parameters. A separate announcement about the related operational details will be issued shortly.
Keywords: Asia Pacific, Hong Kong, Banking, Securities, LCR, FIMA Repo Facility HQLA, Banking Liquidity Rules, COVID-19, Liquidity Risk, Liquidity Maintenance Ratio, Basel III, HKMA
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