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    HKMA Issues Guidance on Implementing BCBS FAQs on Benchmark Reforms

    July 23, 2020

    HKMA published a circular that provides guidance to authorized institutions about the prudential issues recently addressed in the set of frequently asked questions (FAQs) published by BCBS with respect to the recent developments on benchmark rate reforms. These issues cover the definition of capital, market risk, counterparty credit risk, liquidity risk, and operational risk. BCBS published the recent set of FAQs on June 05, 2020.

    The following are the key highlights of the guidance provided by HKMA:

    • Regarding the question on whether amendments to the contractual terms of capital instruments would potentially trigger a reassessment of their eligibility as regulatory capital, HKMA adopts an approach that is in line with the BCBS clarification. Where a capital instrument is amended solely for the purpose of implementing benchmark rate reforms, this will not result in the instrument being assessed anew on whether it meets the minimum maturity and call date requirements under Schedules 4B and 4C of the Banking (Capital) Rules (BCR).
    • HKMA allows authorized institutions, in conducting the real price observation test for a new benchmark rate, to count real price observations of the old benchmark rate from before its discontinuation as well as those of the new benchmark rate, until one year after the discontinuation of the old benchmark rate.
    • With respect to the calculation of expected shortfall in the revised market risk framework, in line with the clarification by BCBS, if the new benchmark rate is eligible for modeling but was not available during the stressed period, HKMA allows authorized institutions to use, for the current period, the new benchmark rate in the full set of risk factors and in the reduced set of risk factors. For the stressed period, HKMA allows the institutions to use the old benchmark rate in the reduced set of risk factors.
    • For purposes of sections 226BZE(4), (5), and (6) under the SA-CCR approach of the future version of the BCR and sections 226M(3), (6), and (7) under the IMM(CCR) approach of the current and future versions of the BCR, authorized institutions may, during the one-year period starting from the date of discontinuation of an old benchmark rate, disregard any transitional illiquidity of collateral and OTC derivative transactions that reference the relevant new benchmark rate when determining whether the collateral is illiquid collateral and whether the OTC derivative transactions cannot be easily replaced.
    • When a type of instrument that references an old benchmark rate and has historically qualified as high quality liquid assets (HQLA) under the Liquidity Coverage Ratio is being replaced with an equivalent type of instrument that references a new benchmark rate, an authorized institution could take into account anticipated increases in the market liquidity of the replacement instrument when determining whether it qualifies as HQLA.
    • With respect to the revised operational risk framework, the BCBS FAQs provide a few clarifications related to the reform of benchmark reference rates and other technical issues, which the HKMA intends to adopt when implementing the framework locally.

    Keywords: Asia Pacific, Hong Kong, Banking, Basel, Benchmark Reforms, Market Risk, Credit Risk, Operational Risk, Liquidity Risk, Regulatory Capital, FAQ, BCBS, HKMA

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