Management Summary
- Purpose / Background: This document (VIR-2) sets out the HKMA’s expectations for "Valuation in Resolution" (VIR) capabilities under the Financial Institutions (Resolution) Ordinance (FIRO). It mandates that Authorized Institutions (AIs) build robust, ex-ante capabilities to support the valuation process during a crisis to ensure orderly resolution and protect financial stability.
- One-line conclusion: AIs must develop, document, and regularly test internal systems, data repositories, and valuation models to enable timely (T+12 days for initial outputs) and robust valuations of assets, liabilities, and equity in resolution scenarios.
- Key Changes:
- Explicit expectation to establish a secure, centralized Virtual Data Room (VDR) to facilitate access by external valuers.
- Requirement to maintain capabilities for three specific sets of valuations (Valuation 1: Failure status; Valuation 2: Resolution transaction; Valuation 3: NCWOL/No Creditor Worse Off).
- Shift toward "proportionate" implementation, prioritizing D-SIBs and large AIs (>HKD 150B assets).
- Requirement to perform T+12 day turnarounds for initial Valuation 2 outputs.
- Mandate for formal internal governance (accountable officer) and independent validation/audit of valuation models.
- Key Dates / Deadlines: Document effective as of 24.07.2026. Implementation timelines will be communicated to individual AIs via future resolution planning priority letters.
- Applicability / Impact scope: All AIs, their holding companies, and affiliated operational entities.
- Recommended management actions:
- Self-Assessment: Perform a gap analysis of current data/MIS capabilities against VIR-2 requirements.
- Data Governance: Appoint an accountable senior officer to oversee VIR capabilities and establish a formal VDR framework.
- Capability Building: Develop "living" valuation models for material entities/assets and conduct annual testing/validation.
- Integration: Embed VIR processes into the existing broader resolution planning (RA-2) and business-as-usual (BAU) risk frameworks.
- Documentation: Develop "resolution playbooks" that outline data sources, valuation methodologies, and internal approval flows.
Detailed Summary
1) Document Overview
VIR-2 serves as the operational standard for VIR under FIRO. It aims to prevent valuation-related impediments to resolution by ensuring AIs are "resolution-ready" regarding data quality, modeling agility, and governance transparency.
2) Main Requirements
- Data & Information: Must maintain granular data in an accessible MIS; cross-reference data sources; establish VDR protocols; and ensure third-party service provider data is reachable.
- Models & Methodologies: Must build models for material assets/liabilities; maintain "baseline scenarios" for post-stabilization; and incorporate sensitivity analysis for market volatility.
- Governance: Clear accountability; board-level oversight; liaison officer designated for external valuers; and secure, confidential access protocols.
- Documentation: Comprehensive playbooks covering business lines, valuation groupings, data lineage, model limitations, and approval hierarchies.
- Testing: Annual testing/validation required, including internal audit or independent third-party review.
3) Key Changes
- Formalization of the "T+12" delivery expectation for Valuation 2.
- Expansion of scope to include consolidated and solo-consolidated valuations, covering LAC and capital groups.
- Increased rigor in modeling NCWOL (Valuation 3) and "gone-concern" counterfactuals.
4) Important Dates & Transition
- Effective Date: 24.07.2026.
- Implementation: Iterative, risk-based approach directed by the HKMA through bilateral planning programs.
5) Impact and Risks
- Operational: High burden for MIS/IT upgrades to support real-time data extraction.
- Compliance: Risk of being flagged with a "significant impediment" to resolution if capabilities are insufficient, triggering potential regulatory direction/enforcement under section 14 of FIRO.
- Strategic: Need for alignment between internal business valuation models (BAU) and resolution-specific modeling.
6) Compliance Action Checklist
- [ ] Conduct comprehensive gap analysis (BAU vs. Resolution requirements).
- [ ] Define "Materiality" thresholds for entities and asset classes.
- [ ] Map data lineage for all material asset/liability classes.
- [ ] Establish and test the VDR setup process.
- [ ] Update internal policy to include VIR governance and accountability.
- [ ] Initiate annual validation plan for valuation models.
7) Appendices/attachments summary
- Annex 1: Details specific technical requirements for Valuations 1, 2, and 3, focusing on economic value, equity modeling, and the "no-creditor-worse-off" (NCWOL) safeguard assessment.
- Annex 2: Provides an illustrative list of required data points (categorized by assets/liabilities) that AIs must maintain to ensure valuation readiness.