under the Stay Rules because it would be practically difficult for covered entities to negotiate and amend a covered financial contract with central banks in line with the Rules. The respondents also submitted that central banks tend to be sensitive to financial stability concerns and may not behave in a manner which undermines the resolvability of a covered entity; and some central banks may be subject to legal immunity from contractual protections.
Having considered comments received and implications for the overall objective of the Stay Rules, we intend to extend the ‘excluded counterparties’ definition to cover central banks and governments, in Hong Kong and in non-Hong Kong jurisdictions.
Respondents’ comments MA’s response Three respondents further suggested that central governments,
sovereign entities, other governmental and quasi-governmental entities and international financial institutions (including multilateral development banks), as well as agencies or branches of central governments, should be excluded from the Rules, in addition to central banks.
26. Certain respondents sought clarity on the definition of FMI under the Stay Rules and whether the definition of FMI under FIRO covers those from a third country.
The intention is for the Rules to adopt the definition of ‘financial market infrastructure’ under the FIRO, the meaning of which is not limited by the location or jurisdiction of incorporation of an FMI.
27. One respondent suggested excluding ‘customer cleared transactions’, meaning transactions between a clearing member of a CCP (or any intermediate clearing firm) and its customer (including an intermediate clearing firm) in respect of which a clearing member has entered into a related cleared transaction with the CCP substantially contemporaneously with entry into the customer transaction.
In accordance with the temporary stay provision under the FIRO, the policy intention for the Stay Rules is to exclude FMIs (including CCPs) as counterparties, but not the clearing members of a CCP.
28. One respondent queried whether the Rules can be effectively implemented when the termination rights of a financial institution are suspended while such rights can be exercised immediately by a CCP (e.g. clearing houses) during resolution.
Any imposition of a stay of a counterparty’s termination rights, pursuant to section 90 of the FIRO, is a matter for the discretion of a resolution authority, ultimately with a view to achieving the resolution objectives. In line with the temporary stay provision under the FIRO, we consider it appropriate to exclude contracts entered into by a covered entity to which FMIs (including CCPs) are the only counterparties.
Securing the continued access of an AI in resolution to FMIs including CCPs is important to ensuring that the AI’s critical financial functions
Respondents’ comments MA’s response
can be continued without interruption. In this regard, the FSB published its Guidance on Continuity of Access to Financial Market Infrastructures for a Firm in Resolution5 in 2017, which sets out a range of arrangements to support continued access to FMIs by a firm in resolution. One such arrangement relates to the contractual rights and obligations of an FMI that would be triggered by entry into resolution of an FMI participant, its parent or affiliate. The MA has started working with a number of FMIs with a view to have a greater ex ante common understanding of the actions that could be taken in the resolution of an FMI participant so as to have confidence and certainty around continuity of the participant’s access to the FMI whilst achieving orderly resolution. An example of this work is the update of the Clearing House Automated Transfer System (or
‘CHATS’) and Central Moneymarkets Unit (or ‘CMU’) scheme rules to support continuity of access for AIs in resolution.
29. Two respondents asked whether exchange traded contracts are excluded.
Similar to the case of FMIs as described in paragraph 36 of the main text, a contract would not be excluded solely because it is traded on an exchange. However, to the extent that the counterparties to such contracts comprise excluded counterparties, the exclusions apply in the same way as described in paragraph 36 of the main text.
30. Certain respondents suggested that the MA limit the application of the Stay Rules to covered financial contracts which are entered into with certain categories of counterparties by adopting thresholds with respect to contract notional amount or size / types of counterparties.
The MA considers a threshold with respect to contract notional amount or counterparty size may be susceptible to regulatory arbitrage and can pose significant risks to resolvability and the effective application of a temporary stay in a resolution. In the interest of maintaining a level-playing field, the MA does not intend
5 https://www.fsb.org/wp-content/uploads/P060717-2.pdf
Respondents’ comments MA’s response
to specifically exclude or exempt counterparties based on the contract notional amount or counterparty size / types.
31. One respondent suggested that intra-group financial contracts should be excluded, on the basis that an intra-group counterparty is, broadly speaking, less likely to seek a disruptive termination of contract, as the group entities should generally be supportive of the resolution action.
Having considered a number of factors including level-playing field and the importance of securing better contractual certainty in a resolution from a group resolvability perspective, we are of the view that intra-group entities should not be treated as excluded counterparties under the Stay Rules.
32. One respondent suggested the MA should ensure flexibility where a fund manager executes a contract on behalf of multiple funds, to ensure that the fund manager and its counterparty to a within scope contract are able to implement the requirements under the Stay Rules either on an individual fund level or a fund manager level.
Another respondent suggested that, with reference to the approach taken in certain jurisdictions, a party acting merely as an agent or in the capacity as a trustee, such as those defined as trust companies under the Companies Ordinance (Cap. 622) read with the Trustee Ordinance (Cap. 29), should be excluded from the scope of covered entities under the Rules.
The MA does not consider it necessary to distinguish in the Stay Rules whether a contract is entered into by another party (e.g. fund manager, agent, trustee) on behalf of a covered entity, or by the covered entity in its proprietary capacity. In any case, the onus is always on a covered entity to identify contracts that fall under the scope of the Stay Rules and ensure compliance accordingly.
33. One respondent sought guidance on agreements entered into with multiple counterparties, and whether the existence of an excluded counterparty as one of the parties to an agreement would exclude that agreement from the scope of the Stay Rules entirely.
The policy intent is that if excluded counterparties are the only counterparties to a within scope contract entered into by a covered entity, the contract will not be required to include the suspension of termination rights provision under the Stay Rules. However, for a within scope contract that is entered into with more than one counterparty comprising both an excluded counterparty (for example, an FMI) and a non-excluded counterparty, the Stay Rules would still require the contract to include the suspension of termination rights provision. In the case of an FMI for instance, a
Respondents’ comments MA’s response
contract would not be excluded solely because an FMI is one of the parties (assuming that there are other counterparties which are not excluded counterparties) to the contract, or because the contract is settled by an FMI.
Respondents’ comments MA’s response