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    HKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk

    January 18, 2022

    The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022. HKMA also revised the Supervisory Policy Manual module TA-2 on foreign exchange risk management. Moreover, following the completion of the 2022 Article IV Consultation with the Hong Kong Special Administrative Region (HKSAR), the International Monetary Fund (IMF), in its concluding statement, commended the robust institutional frameworks in the country, complemented by effective policy responses for boosting economic growth and safeguarding financial stability.

    The Policy Module on draft FIRO Code of Practice chapter is intended to provide guidance on the expectations of HKMA in relation to the capabilities and arrangements of an authorized institution to support liquidity and funding in resolution. The liquidity and funding in resolution capabilities and arrangements developed in line with this chapter are expected to take into account, as appropriate, the various phases including the lead up to resolution; the stabilization phase; and the post-stabilization restructuring phase. The Code of Practice chapter outlines the expectation that an authorized institution should develop and document a methodology to estimate ex ante the liquidity and funding needed to facilitate orderly resolution. It also outlines expectations concerning an authorized institution’s capabilities to measure, monitor, and report on liquidity and funding needs as well as available liquid assets in a resolution scenario. Further, it provides guidance on the expectations of HKMA on the authorized institution’s capabilities to assess the need for and availability of third-party funding, and for identifying and mobilizing collateral and monitoring aggregate asset encumbrance levels. The chapter also addresses expectations on governance arrangements related to liquidity and funding in resolution, as well as sets out expectations regarding an authorized institution’s testing and validation activities. 

    The revised SPM module on foreign-exchange risk introduces changes to mainly incorporate the supervisory guidance of BCBS for managing risks associated with the settlement of foreign exchange transactions. The main purpose of the module is to set out the approach which HKMA will adopt in the supervision of foreign exchange risk and any associated settlement-related risks, and to provide guidance to authorized institutions on the key elements of an effective risk management framework for such risks. The start of full compliance should be commensurate with authorized institutions’ exposures to foreign exchange settlement-related risks but not be reached later than one year from January 18, 2022. HKMA encourages authorized institutions to settle foreign exchange transactions through available payment-versus-payment arrangements in an effort to reduce their foreign exchange settlement-related risks.

    In the concluding statement on the Article IV consultation with HKSARthe IMF Mission reaffirmed Hong Kong's position as a major international financial center and recognized that the financial sector in the country, underpinned by robust regulatory and supervisory frameworks, has continued to expand robustly, even during the pandemic. In addition, the Mission views that capitalizing on opportunities from the Mainland and strengthening regional and international collaboration on the green development front are conducive to consolidating Hong Kong's position as a major international financial center. The IMF Mission acknowledged that Hong Kong has made significant progress in addressing climate change in the past decade and welcomed the recently announced plan to achieve carbon neutrality before 2050, with an intermediate target to halve the 2005 level of carbon emissions before 2035. The Mission also recognized the government's ongoing efforts to enhance the green and sustainable finance ecosystem, such as adopting internationally accepted standards and promoting eligible green and sustainable financing. The Mission also supported the government's three-pronged approach to containing housing market risks and increasing housing affordability (which include macro-prudential measures, demand-side management measures, and an increase in housing supply). The Mission comments that the current macro-prudential measures for the property market should be maintained to safeguard financial stability and the demand-side management measures have been effective in containing speculative activity and external demand. The Mission also welcomes the government's stepped-up efforts to raise and expedite housing supply, including the multifaceted approach to providing additional public housing units in the next 10 years and the recently announced Northern Metropolis Development Strategy.

    Keywords: Asia Pacific, Hong Kong, Banking, Resolution Framework, Code of Practice, FIRO, Resolution Planning, Foreign Exchange Risk, Supervisory Policy Manual, Climate Change Risk, ESG, Financial Stability, Sustainable Finance, IMF, HKMA

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