HKMA Aligns Benchmark Reform Guidance for Banks with BCBS

Source: Regulation Asia Editors, Regulation Asia 2020-07-27

HKMA’s new guidance covers issues with benchmark reform relating to the definition of capital, market risk, counterparty credit risk, liquidity and operational risk.

The HKMA (Hong Kong Monetary Authority) has published new benchmark reform guidance on issues relating to the definition of capital, market risk, counterparty credit risk, liquidity and operational risk.

The guidance is in line with the BCBS (Basel Committee on Banking Supervision) FAQs about prudential issues relating to benchmark reforms published on 5 June, and comes soon after the HKMA set out new milestones for Hong Kong banks in their LIBOR transition programmes.

Definition of capital: Amendments to the contractual terms of capital instruments will not trigger a reassessment of whether they meet minimum maturity and call date requirements, or whether they are still eligible as regulatory capital, if such amendments are solely for the purpose of implementing benchmark rate reforms.

Market risk: When conducting the RFET (risk factor eligibility test) – which require real price observations and sufficient market liquidity that may not be available in new benchmark rates – banks may include historical prices of the old benchmark rate for up to one year after its discontinuation when conducting the real price observation test.

The old benchmark may also be used when calculating capital requirements under the revised IMA (internal models approach), where benchmark rates are required to calculate market risk and expected shortfall during a historical stressed period.

Counterparty credit risk: For one year after an old benchmark rate is discontinued, banks may disregard any transitional illiquidity of collateral and OTC derivative transactions referencing a new benchmark rate when determining whether the collateral is illiquid collateral and whether the OTC derivative transactions cannot be easily replaced.

Liquidity: When an HQLA instrument referencing an old benchmark rate is being replaced with an equivalent type of instrument referencing a new benchmark rate, banks can take into account anticipated increases in the market liquidity of the replacement instrument when determining whether it qualifies as HQLA.

Operational risk: Operational risk losses from benchmark reform do not fulfil the criteria for exclusion from the operational risk charge based on OPE25.30 of the BCBS’s consolidated framework. Therefore, banks should make the necessary preparations for the transition to alternative rates to minimise operational risk losses.

HKMA

Benchmark Reform

HKMA Aligns Benchmark Reform Guidance for Banks with BCBS

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