Respondents’ comments MA’s response 1. On timing of implementation of LAC
requirements, a number of respondents mentioned that the MA should consider phasing in the requirements to avoid a glut of LAC debt
The MA’s present intention is to classify resolution entities and material subsidiaries of non-EME G-SIBs on a timetable requiring them to meet the minimum FSB TLAC requirements in 2019.
The expectation is that other relevant entities will be classified as resolution entities and material subsidiaries by 1 January 2020, and so will need to meet their respective LAC requirements by 1
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Respondents’ comments MA’s response instruments coming to the market within a short
period of time.
January 2022 (i.e within 24 months of classification). See paragraph 7 above.
However, ahead of formal classification, the MA expects to provide AIs with indications of which entities will be classified, and indications of the MA’s thinking on key determinations that will affect LAC calibration (for example, variations to the resolution component ratio or the internal LAC scalar).
The MA’s existing view is that this timeline will provide issuers with sufficient flexibility to allow them to issue LAC to a timetable that would not strain market capacity.
2. More generally, the point was made that requirements should not be imposed too quickly – one respondent submitted that AIs that were not G-SIBs or D-SIBs should have 48 months to meet their requirements (rather than the 24 months proposed in the CP), or should not have to meet requirements any earlier than 1 January 2022.
One respondent said that for G-SIBs, implementation timelines should be agreed with CMGs, and two respondents said that the FSB’s
The MA’s thinking on the implementation timeline for LAC requirements is set out in paragraph 7 above. Note that on this timeline, apart from non-EME G-SIBs, no AIs would be required to meet any LAC requirements before 1 January 2022. The MA acknowledges that in light of the fact that the AI LAC Rules will not be in force any earlier than around the end of this year, meeting the FSB’s deadline of 1 January 2019 may present challenges for the affected non-EME G-SIBs, which is why the current planning assumption is that relevant entities will not be required to begin complying with LAC requirements until three months after their classification as resolution entities or material subsidiaries (as applicable).
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Respondents’ comments MA’s response timeline of 1 January 2019 for non-EME G-SIBs
would be challenging.
3. Several respondents questioned the proposal that resolution entities and material subsidiaries that were AIs should also be required to meet their respective LAC requirements on a solo basis (as well as on a consolidated basis).
Resolution entities and material subsidiaries that are AIs need to meet regulatory capital requirements on a solo (or solo-consolidated) basis. It follows from this that they should also be required to meet LAC requirements on the same basis, so that should they suffer losses that wipe out their regulatory capital requirements, they have sufficient remaining LAC to be recapitalised, allowing them to again meet their regulatory capital requirements on a solo basis in resolution.
However, the MA acknowledges that in some circumstances requiring an AI to meet its LAC requirement on a solo basis may limit flexibility in the application of the proceeds of LAC issuance. The MA therefore proposes that while the AI LAC Rules should require AIs to meet LAC requirements on a solo basis, the MA should have the power to vary down the solo requirement, should the MA consider it prudent to do so in the circumstances, by reducing the solo LAC scalar to less than 100%. The MA’s present intention is that the AI LAC Rules will set out the following factors that the MA may take into consideration in the calibration of the solo LAC scalar: (i) the extent to which setting the scalar at 100% would result in the entity having to maintain a higher level of loss-absorbing capacity than that required to meet its LAC requirements on a consolidated basis; (ii) the extent to which setting the scalar at 100% would impact on the quantity and availability of non-pre-positioned LAC; and (iii) any other matters the
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Respondents’ comments MA’s response MA considers relevant.
4. Differing views were expressed on the period within which AIs should be required to respond to an increase in LAC requirements – one respondent thought the proposed 12 months may be workable, another said the period should be 24 months, to be consistent with the proposed grace period for rectifying breaches of LAC requirements.
The MA’s existing view is that requiring any increase that arises as a result of the exercise by the MA of a power of variation under the AI LAC Rules to be met within 12 months is appropriate, as it could be anticipated that increases are likely to be relatively small in comparison to the overall LAC requirement. It is intended that this conformance period will be effected by requiring the MA to give 12 months’ notice of any such increase. Where the MA thought necessary, the MA would be able to provide a longer notice period.
5. Two respondents asked how AIs would be able to observe LAC requirements on an ongoing basis, when RWAs and the exposure measure are constantly changing. Clarity was also sought on whether an exemption would be allowed for when RWAs / exposure measure increased significantly in relation to, for example, an IPO financing.
The issues AIs face in complying with LAC requirements on an ongoing basis when RWAs and the exposure measure are constantly changing are comparable to those faced in complying with regulatory capital requirements on an ongoing basis. Accordingly, the MA’s expectation is that resolution entities and material subsidiaries should be able to manage the issue for LAC requirements as they do for regulatory capital requirements.
Consistent with the TLAC holding standard issued by the Basel Committee on Banking Supervision in October 2016, the HKMA’s consultation paper CP18.03 ‘Implementation of TLAC Holdings Standard’ proposed to make available an additional 5% exemption for a bank’s ‘TLAC holdings’,
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Respondents’ comments MA’s response
primarily in order to facilitate market-making activities. Under the proposal, any amount of TLAC holdings that is within the threshold is allowed to be risk-weighted (instead of being deducted from capital).