LM-1 Regulatory Framework for Supervision of Liquidity Risk

1. Document overview

• Document: SPM LM-1 “Regulatory Framework for Supervision of Liquidity Risk”, Version 5 (19.12.2025).
• Status: Statutory guideline issued by the MA under Banking Ordinance (BO) §7(3).
• Purpose:
• Guide AIs on application of the Banking (Liquidity) Rules (BLR).
• Explain HKMA’s supervisory approach to assessing compliance with statutory liquidity requirements.
• Supersedes: LM-1 V.4 dated 13.12.2024.
• Application: All authorized institutions (AIs).
• Positioning in framework:
• Must be read with BLR, the LCR Code of Practice (Banking (Liquidity Coverage Ratio – Calculation of Total Net Cash Outflows) Code, Dec 2014), Completion Instructions (CIs) for returns MA(BS)1E and MA(BS)26, SPM LM-2, and other relevant SPM modules (e.g., SA-1, IC-1, IC-5, CA-G-5, CA-D-1).

1. Main requirements (grouped by topic)
   A. Supervisory approach and supervisory information flows

• HKMA objective: promote resilience of AIs to liquidity stress; mitigate systemic and institution-specific liquidity risks.
• Risk-based supervision tools include:
• Off-site reviews, on-site examinations, and prudential meetings (cross-ref SA-1).
• Primary liquidity monitoring returns (non-exhaustive):
• MA(BS)1E: liquidity position under LCR or LMR.
• MA(BS)26: stable funding position under NSFR or CFR.
• MA(BS)22: intraday liquidity position.
• MA(BS)23: liquidity monitoring tools (e.g., funding concentration, unencumbered assets, committed facilities, maturity mismatch; and for Category 1, LCR by significant currencies).
• MA(BS)18: selected data for liquidity stress-testing (locally incorporated licensed banks; short-term liquidity stress covering 7 working days).
• HKMA may request additional information (e.g., internal cash-flow projections, stress test results, assumptions/methodologies).
• Supervisory outcomes:
• Liquidity findings feed into CAMEL rating; for locally incorporated AIs, may affect regulatory capital requirement under the Supervisory Review Process (CA-G-5).

B. Statutory liquidity ratios and minimum thresholds

• LCR (Category 1 institutions)
• Definition: LCR = (Total weighted HQLA / Total weighted total net cash outflows over 30 calendar days) × 100%.
• Minimum LCR levels (rule 4(1)–(2)):
• 2015: 60%; 2016: 70%; 2017: 80%; 2018: 90%; 2019 and after: 100%.
• Stress use carve-out (rule 4(3)):
• Falling below minimum does not contravene rule 4(1)/(2) if (and only if) due to monetisation of HQLA under significant financial stress meeting rule 6 conditions.
• LMR (Category 2 institutions)
• Definition: LMR = (Liquefiable assets / Qualifying liabilities (after deductions)) × 100%, measured over a calendar month.
• Minimum: not less than 25% on average in each calendar month (rule 7).
• NSFR (Category 1 institutions)
• Definition: NSFR = (Available Stable Funding (ASF) / Required Stable Funding (RSF)) × 100%.
• Minimum: at all times not less than 100% (rule 8A), unless self-rectification provisions apply (rule 8B).
• CFR (Category 2A institutions)
• Definition: CFR = (Available Core Funding (ACF) / Required Core Funding (RCF)) × 100%.
• Minimum (rule 8D):
• Year 2018: ≥50% monthly average.
• On/after 1 Jan 2019: ≥75% monthly average.

C. Bases of calculation (Hong Kong office / unconsolidated / consolidated / tailored)

• HKMA power: BO §97H(3); implementation in BLR rules 10–12.
• Hong Kong office basis (rule 10(1)(a)):
• Every AI must calculate applicable statutory liquidity ratio(s) covering all business in Hong Kong.
• Unconsolidated basis for locally incorporated AIs with overseas branches (rule 10(1)(b)):
• Must also calculate covering Hong Kong + overseas branches, unless HKMA approves exclusion of an overseas branch (rule 10(3)(a)) where overseas branch liquidity risk is immaterial (e.g., inactive branch expected to remain so).
• Consolidated basis for locally incorporated AIs with associated entities (rule 11(1)):
• HKMA may require additional calculation on consolidated basis (HK office or unconsolidated basis, plus specified associated entities).
• Consolidation requirement aligned with Basel standards for internationally active locally incorporated AIs (cross-ref paragraph 4.2.2 in module).
• Liquidity consolidation scope may differ from capital/large exposure scopes; may include associated entities not majority owned/controlled if liquidity risk to AI is significant and activities fall within relevant financial activities (rule 11).
• Specially tailored basis (rule 12):
• HKMA may require additional calculation covering any part of business in/outside Hong Kong in exceptional circumstances where rules 10–11 bases are insufficient to reflect liquidity risk profile.
• Associated-entity change notification (rule 13):
• Locally incorporated AIs calculating ratios on consolidated basis must notify HKMA in writing “as soon as practicable” after becoming aware of specified matters about associated entities (e.g., becoming/ceasing to be associated entities; principal activities/changes), enabling HKMA review of consolidation scope.
• Host jurisdiction differences:
• LCR: apply BLR + Code unless rule 22(2) applies (then, for retail deposits and small business funding in that host location, follow host supervisor requirements for that part of calculation).
• NSFR: apply BLR unless rule 64(2) applies.

D. Notification of liquidity events and HKMA supervisory responses

• General: AIs have notification obligations under BO and BLR tied to LCR/LMR/NSFR/CFR as applicable.
• Anticipated shortfall notifications:
• Category 1 (rule 5): notify HKMA ASAP of any anticipated change in HQLA or total net cash outflows that will (or could reasonably be construed as potentially) cause failure to maintain required LCR.
• Category 2 (rule 8): similar requirement for anticipated changes affecting ability to maintain ≥25% LMR.
• NSFR (rule 8C): Category 1 must notify HKMA ASAP if NSFR self-rectification mechanism in rule 8B applies.
• Immediate notification of “relevant liquidity events” (rule 14; prescribed notification requirements under BO §97I):
• AI must immediately notify HKMA of prescribed “relevant liquidity event” and provide particulars on request.
• Examples of relevant liquidity events include:
• Category 1: LCR breach not due to permitted HQLA monetisation; action to monetise HQLA that will/could cause LCR breach; failure to comply with HKMA-imposed conditions under rule 16(1); NSFR breach where rule 8B does not apply; and (for “rule 37 institutions”) failure to maintain HKD-denominated Level 1 HQLA ≥20% of HKD-denominated total net cash outflows.
• Category 2: failure to comply with rule 7 (LMR 25% minimum monthly average).
• Category 2A: failure to comply with rule 8D (CFR minimum).
• Consequences:
• Contravention may lead HKMA to issue remedial notice under BO §97J requiring specified remedial actions within a reasonable timeframe; escalation possible (more serious measures) to protect depositors and system stability.
• Governance/legal risk:
• Non-compliance with prescribed notification requirements may constitute an offence for every director, chief executive and manager (BO §97I).

E. Internal targets and limits (beyond regulatory minima)

• HKMA expectation:
• Each AI should set an internal target for applicable statutory liquidity ratio(s) with a buffer (“safety cushion”) above minimum regulatory requirements.
• Board (or board-level committee) review and approval: at least annually.
• Must be documented in liquidity risk management policy.
• Review should consider historical trends (e.g., persistent near-minimum ratios or volatility over ~past 12 months may warrant higher buffers).

F. Liquidity disclosure standard (Banking (Disclosure) Rules)

• Under BDR (subject to exemptions), AIs must disclose liquidity-related information using templates/tables specified by HKMA:
• Annual qualitative disclosure: liquidity risk management approach (Table LIQA) including business model, liquidity risk profile, organization structure/functions for liquidity risk management.
• Quantitative disclosures:
• Quarterly disclosure of liquidity position represented by statutory ratios.
• Standard templates include LIQ1 (quarterly LCR) and LIQ2 (semi-annual NSFR); other quarterly liquidity disclosures may not have standard formats.
• Additional guidance: SPM CA-D-1 for interpreting/compliance with BDR; HKMA encourages voluntary additional disclosures where practical (e.g., liquidity cushion composition; additional collateral requirements upon rating downgrade).

1. Key changes (vs previous requirements)

• The document states it supersedes LM-1 V.4 (13.12.2024) with LM-1 V.5 dated 19.12.2025.
• Based on the module’s stated structure and content emphasis, V.5 consolidates/refreshes HKMA guidance across:
• Application of all four statutory liquidity ratios (LCR/LMR/NSFR/CFR),
• Notification and supervisory response expectations, and
• Explicit coverage areas such as cryptoassets and HQLA monetisation under stress.
  *(No detailed redline is provided in the extracted text; institutions should perform their own V.4 vs V.5 comparison for precise amendments.)*

1. Important dates & transition

• Version date: 19.12.2025 (V.5).
• Superseded version: 13.12.2024 (V.4).
• Statutory ratio minima referenced (ongoing and already effective):
• LCR: 100% from 2019 onward.
• NSFR: 100% at all times (subject to rule 8B self-rectification).
• LMR: 25% monthly average.
• CFR: 75% monthly average from 1 Jan 2019 onward.

1. Applicability & impact scope

• Applies to all AIs; differentiated by designation:
• Category 1: LCR + NSFR regime (including possible ALA features and HKD HQLA composition requirement for “rule 37 institutions”).
• Category 2: LMR regime.
• Category 2A: CFR regime.
• Locally incorporated AIs:
• May face multi-basis calculations (HK office, unconsolidated, consolidated, and exceptionally tailored bases), and associated-entity notifications affecting consolidation perimeter.
• Supervisory intensity and on-site scope are risk-based and AI-specific.

1. Compliance action checklist (practical steps)

• Governance & policy
• Confirm category designation (1 / 2 / 2A) and applicable ratios (LCR/LMR/NSFR/CFR).
• Set internal liquidity ratio targets above minima; ensure annual board/board-committee approval and policy documentation.
• Regulatory calculation & scope
• Validate calculation bases required under BLR rules 10–12 (HK office basis minimum; add unconsolidated/consolidated/tailored where applicable).
• Maintain procedures to identify and promptly notify HKMA of associated-entity changes relevant to liquidity consolidation (rule 13).
• For cross-border entities, assess whether host-rule substitution conditions apply for LCR (rule 22(2)) and NSFR (rule 64(2)).
• Monitoring, reporting & data
• Ensure timely, accurate submissions of key HKMA liquidity returns (MA(BS)1E, 26, 22, 23, 18) with controls over data lineage and governance.
• Prepare for HKMA ad hoc information requests (cash-flow projections, stress testing results, methodology/assumptions).
• Notification & escalation readiness
• Implement triggers for “anticipated change” notifications (rules 5 and 8) and NSFR self-rectification notification (rule 8C).
• Implement immediate escalation and notification playbooks for “relevant liquidity events” (rule 14), including clear roles for directors/CE/managers given BO §97I implications.
• Maintain remediation plans for potential HKMA directions under BO §97J.
• Disclosure
• Review BDR liquidity disclosures (LIQA, LIQ1, LIQ2 and other quarterly disclosures) and align with SPM CA-D-1 guidance; consider voluntary disclosures encouraged by HKMA.

1. Attachments/appendices note (if any, 1-3 lines only)

• Annex 1: High-level guidance on when assets are considered “free from encumbrances” for LCR/LMR/NSFR.
• Annex 2: High-level guidance and HKMA approval approach for recognising RMBS within HQLA/liquefiable assets and related criteria.
• Annex 3: High-level guidance on regulatory treatments of cryptoasset exposures under LCR/LMR/NSFR/CFR (including eligibility constraints for recognising cryptoassets as HQLA).