Management Summary
- Purpose / Background: This document defines the collateral eligibility and haircut requirements for banks accessing HKMA Liquidity Facilities, specifically covering Settlement Facilities, Standby Liquidity Facilities, the Contingent Term Facility, and the Resolution Facility.
- One-line conclusion: Banks must align their internal collateral management systems with these standardized haircut structures and maintain operational readiness for asset eligibility verification.
- Key Changes:
- Established specific haircut tiers based on asset class (ranging from 2% to 8%+).
- Introduced variable haircut floors (2.5% to 7%) for non-government security collateral.
- Defined specific eligibility for HOS/PSPS mortgages and HKMC-compliant mortgages under Credit Facility arrangements.
- Explicitly allowed for "green consideration" assessments for supranational debt securities.
- Formalized the bilateral engagement process for utilizing "other loan assets" as collateral.
- Key Dates / Deadlines: Immediate application for all current and future liquidity facility interactions; no explicit transition period mentioned.
- Applicability / Impact scope: All authorized institutions (AIs) participating in HKMA liquidity facilities.
- Recommended management actions:
- Conduct a gap analysis of the bank’s current unencumbered liquid asset portfolio against the HKMA haircut table.
- Update internal collateral valuation models to incorporate the specific haircut percentages provided.
- Establish a reporting workflow for supranational securities to capture potential "green" eligibility criteria.
- Initiate bilateral discussions with the HKMA regarding the operational readiness of "other loan assets" if the bank intends to use them for Contingent/Resolution facilities.
Detailed Summary
1) Document overview
This Operational Note prescribes the technical collateral framework for HKMA liquidity facilities. It sets out the asset classes, valuation methods, and mandatory minimum haircuts required for banks to access various liquidity instruments.
2) Main requirements
- Settlement Facilities: Limited to Exchange Fund Bills and Notes (EFBN) via repo; 2% haircut based on remaining maturity.
- Standby Liquidity Facilities: Covers a broader range, including EFBN (2.5% minimum), Government Bonds (2.5% minimum), High-quality supranational/government securities (3% minimum), and investment-grade corporate securities (7% minimum).
- Contingent Term / Resolution Facilities: Accepts the collateral listed above plus residential mortgages and specific loan assets.
3) Key changes (vs previous requirements)
- Standardization of haircut minimums for non-government securities (ranging from 3% to 7%).
- Explicit integration of "green considerations" as a factor in determining the eligibility of supranational debt securities.
4) Important dates & transition
The requirements are effective immediately. Banks should treat these as current operational standards for all facility access.
5) Impact and risks
- Operational: Requires precise data mapping of asset portfolios against HKMA-approved collateral lists.
- Liquidity Management: The application of specific haircuts (up to 8%) reduces the available funding capacity per dollar of collateral held, requiring adjusted liquidity buffer planning.
- Compliance: Failure to meet eligibility criteria or miscalculating haircuts will result in immediate rejection of collateral by the HKMA.
6) Compliance action checklist
- [ ] Categorize internal liquid assets by HKMA eligibility class.
- [ ] Program the prescribed haircut percentages into the collateral management system.
- [ ] Confirm legal and operational readiness for HOS/PSPS mortgage transfers if intending to use them as collateral.
- [ ] Engage the HKMA if the bank plans to utilize "other loan assets" to understand specific information requirements.
7) Appendices/attachments summary
- Section 1 (Settlement/Standby Collateral Table): Lists specific haircut floors for EFBN, FX, Government Bonds, and investment-grade securities, providing the foundation for liquidity facility collateralization.
- Section 2 (Contingent/Resolution Collateral Table): Details the hierarchy of mortgage collateral (HOS/PSPS vs. HKMC compliant) with specific haircut tiers (2.5% to 8%) and outlines the bilateral framework for utilizing "other loan assets."