Liquefiable assets

6.2.1 As provided under rule 49, only those types of asset specified in Table A in §2 of Schedule 5 to the BLR can be included by a category 2 institution as liquefiable assets. These assets include:

(a) currency notes and coins;

(b) gold bullion;

(c) claims on, or reserves maintained with, the MA or central banks that are repayable to a category 2 institution, overnight, on demand, or on notice which expires on the first day of the LMR period (i.e. within 24 hours from the date at which the LMR is calculated);

(d) net due from banks, subject to the condition that the weighted amount must not exceed 40% of the total weighted amount of a category 2 institution’s qualifying liabilities (before deductions);

(e) Export bills;

(f) Marketable debt securities or prescribed instruments meeting the relevant criteria; and (g) Residential mortgage loans in respect of

which The Hong Kong Mortgage Corporation Limited has issued an irrevocable commitment to purchase which is approved by the MA.

6.2.2 A category 2 institution must not include any asset in its stock of liquefiable assets unless the following criteria (as provided in rule 49(2)) are satisfied:

(a) the asset must be readily monetizable, whether by way of outright sale or being used

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as collateral for secured funding purposes;

(b) the asset must not be overdue or in default;

(c) the asset must be free from encumbrances and there must be no regulatory, legal, contractual or other restrictions that inhibit the category 2 institution from liquidating, selling, transferring or assigning the asset. In this regard, the guidance provided in Annex 1 is also applicable for category 2 institutions to assess whether an asset is “free from encumbrances”;

(d) the value of the asset must be readily identifiable and measurable. In this regard, paragraph 5.2.3(b) above is also applicable for the purpose of identifying liquefiable assets under the LMR;

(e) the asset must be freely transferable and available to the category 2 institution and must not be subject to any liquidity transfer restriction;⁶⁹

(f) the asset must not be a subordinated debt security;

(g) if the asset is a structured financial instrument, the structure of the instrument must be simple and standardised; and

69 In this regard, paragraph 5.2.6(e) is also applicable, with all necessary modifications, for a category 2 institution to assess an asset against this criterion for LMR purposes. This means that the asset concerned must be freely transferable and available to a category 2 institution, whether between its Hong Kong office and any of its overseas branches and specified associated entities (where applicable), and the asset is not subject to any liquidity transfer restriction.

Moreover, as provided in rule 49(3), if one or more assets held by a category 2 institution’s consolidated group member are subject to liquidity transfer restriction, such assets must not be included in the institution’s liquefiable assets for the calculation of its LMR, except to the extent that the qualifying liabilities (after deductions) of the member are also included in the calculation of the institution’s LMR, and the assets so included satisfy all other relevant requirements in rules 49(1) and 49(2). (Please refer to the illustrative example provided in footnote 47 of the CIs for Return MA(BS)1E.)

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(h) the asset must be denominated in HKD or in a currency freely convertible into HKD. In this regard, footnote 2526 is applicable, with all necessary modifications, for the assessment of an asset against this criterion for LMR purposes.

6.2.3 In respect of marketable debt securities, a category 2 institution must not include RMBS in its liquefiable assets unless such inclusion is approved by the MA under rule 49(4). Please refer to the guidance provided in Annex 2 with respect to the consideration of RMBS for LMR purposes.

6.2.4 As set out in Table B of Schedule 5 to the BLR, any debt security or prescribed instrument with a remaining term to maturity of not more than one month issued by a category 2 institution must be deducted from the institution’s liquefiable assets, unless otherwise exempted by the MA.

6.2.5 A category 2 institution must have in place and maintain adequate systems and procedures for the on-going assessment and management of its liquefiable assets to ensure compliance with the relevant qualifying criteria. If an asset included in a category 2 institution’s liquefiable assets ceases to satisfy any qualifying criterion that is applicable to the asset, the institution must exclude the asset from its stock of liquefiable assets as soon as practicable.⁷⁰

6.2.6 If warranted by the actual circumstances, the MA may exercise the power under rule 51 (or rule 52) to orderrequire all category 2 institutions (or individual institutions) not to include an asset or a class of assets as liquefiable assets, with effect from the date or the occurrence of an event specified in a notice issued by

70 In practice, any asset that ceases to be eligible for inclusion in a category 2 institution’s stock of liquefiable assets should be excluded from the stock starting from the first working day (or, if rule 48(2) applies to the institution, the forthcoming day specified by the MA) immediately following the date of cesser.

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the MA under that rule.⁷¹ 6.3 Qualifying liabilities

6.3.1 Qualifying liabilities include all one-month liabilities of a category 2 institution except those liabilities specified in paragraph 6.3.4. As specified in Table C in §2 of Schedule 5 to the BLR, qualifying liabilities are calibrated broadly into the following categories:

(a) total one-month liabilities of a category 2 institution to the MA or central banks;

(b) if a category 2 institution’s total one-month liabilities to banks exceed the total one-month liabilities of banks to the institution, the amount of its total one-month liabilities to banks; and

(c) all other one-month liabilities.

6.3.2 As defined in rule 43, “one-month liability”, in relation to a category 2 institution or its customer, means – (a) any liability, other than a contingent liability,

the effect of which will or could be to reduce within 1 month the liquefiable assets of the institution or its customer; and

(b) any contingent liability that, in the opinion of the MA, may result in a reduction within 1 month of the liquefiable assets of the institution or its customer.

6.3.3 A category 2 institution’s commitment under a facility granted to its customer should be included in the calculation of the institution’s qualifying liabilities for LMR purposes, if –

71 Where necessary, the MA will apply rule 51 (or rule 52) for LMR purposes in a manner similar to the modality of applying rule 29 (or rule 30) for LCR purposes. Paragraph 5.2.8 of this module is also applicable, with all necessary modifications, for LMR purposes.

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(a) the commitment is “irrevocable” as assessed by the institution on reasonable grounds (please refer to paragraph 5.8.22 which is equally applicable for LMR purposes); and (b) either one of the following conditions is met –

(i) the date for the institution to fulfil the commitment is known to fall within the LMR period, or

(ii) the commitment must be fulfilled by the institution on demand or subject to a notice period that will expire within the LMR period (unless there is evidence that any condition attached to the institution’s commitment will not be realised within the LMR period⁷²).

6.3.4 However, a category 2 institution does not need to include the following types of liabilities and obligations for calculating its qualifying liabilities:

(a) pledged deposits;

(b) loan commitments arising from overdraft facilities, credit card facilities and any other facilities granted by a category 2 institution, where such facilities are genuinely and credibly revocable unconditionally by the institution;

(c) trade-related contingencies;

(d) contingent liabilities arising from derivatives contracts;⁷³ and

(e) non-contractual funding obligations, unless

72 For example, these conditions may include the execution of security document and the completion of a certain phase of a project.

73 To avoid doubt, this does not include a category 2 institution’s contractual liabilities under a derivative contract, where such contractual liabilities have materialised and therefore the institution will need to make a contractual payment within the LMR period.

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such obligations have materialised and a category 2 institution is liable to make payment under the obligation on demand or within the LMR period.