HKMA Consults on Stay Rules on Financial Contracts Under FIRO

FIRO, which came into effect in 2017, establishes a cross-sectoral resolution regime for financial institutions that is in line with the international standards. Disorderly termination of contracts by counterparties of a financial institution in a resolution would cause significant contagion effect to the financial markets. FIRO contains a provision that provides a resolution authority with the power to suspend (that is, stay), for a specified period, the termination right of a counterparty to a qualifying contract under certain circumstances. For ensuring the effective implementation of this provision, a resolution authority may make rules that impose a requirement for contractual recognition of the temporary stay power under FIRO

The consultation sets out detailed proposals for the stay rules HKMA intends to make, which will require the entities subject to the rules to adopt appropriate provisions in certain financial contracts to the effect that the parties to the contracts agree to be bound by a temporary stay that may be imposed by HKMA under FIRO. The proposals are designed to be aligned with the relevant principles set by FSB. In drawing up the proposals, HKMA has taken these principles into account and made reference to the approaches adopted in key jurisdictions. 

The consultation paper sets out the relevant FIRO provisions and the international context. It also sets out the proposed scope of the stay rules, operational and implementation matters in relation to the stay rules, along with the next steps intended to be taken in relation to the stay rules. The Annex to the consultation paper sets out the full list of consultation questions. Subject to outcome of the public consultation, the intention is to introduce the rules as subsidiary legislation under FIRO into the Legislative Council for negative vetting in the 2020-2021 legislative session. 

Comment Due Date: March 22, 2020

Keywords: Asia Pacific, Hong Kong, Banking, Securities, Stay Rules, FIRO, Termination of Contracts, Financial Contract, Resolution Framework, FSB, HKMA