Hong Kong Monetary Authority Consults On Rules On Contractual Stays On Termination Rights In Financial Contracts.

Legal News & Analysis - Asia Pacific - Hong Kong - Capital Markets - Dispute Resolution

25 March, 2020


On 22 January 2020, the Hong Kong Monetary Authority (the “HKMA”) published a consultation paper on proposals for making rules relating to contractual stays on termination rights in financial contracts for authorized institutions under the Financial Institutions (Resolution) Ordinance (Cap. 628) (the “FIRO”).


The consultation paper sets out detailed proposals for the stay rules that the HKMA intends to make under the FIRO, which will require that the entities subject to the rules adopt appropriate provisions in certain financial contracts to the effect that the contractual parties agree to be bound by the temporary stay that may be imposed by the HKMA under the FIRO.


The consultation period ends on 22 March 2020.




The FIRO (which, except for certain provisions, came into operation in July 2017) establishes a regime for the orderly resolution of systemically important financial institutions (“FIs”) in the banking, insurance, and securities and futures sectors, as well as certain financial market infrastructures in Hong Kong. Under the FIRO, the resolution authorities are given certain statutory powers to manage the failure of a within-scope FI in an orderly manner in order to avoid disruption to financial stability. The statutory powers under the FIRO are consistent with the international standards set by the Financial Stability Board in its “Key Attributes of Effective Resolution Regimes for Financial Institutions” issued in October 2011.


To address the risk of disorderly termination of contracts on a mass scale when a within-scope FI goes into resolution, the FIRO provides two statutory mechanisms for staying early termination rights that may arise in contracts from the exercise of resolution powers under the FIRO. The first is an ongoing stay provision1 which overrides any default event provision in a contract entered into by a qualifying entity2 where the substantive obligations including payment and delivery obligations and provisions of collateral continue to be performed. The other is a statutory power3 given to the resolution authorities to suspend for a specified period (“temporary stay”) the termination rights of a counterparty to a qualifying contract (i.e. one under which the obligations provided for in it for payment and delivery and for provision of collateral continue to be performed) under certain circumstances. These two statutory stay provisions complement each other in managing early termination risks in resolution.


To ensure the effectiveness of the temporary stay power given to Hong Kong resolution authorities under the FIRO, especially in non-Hong Kong law governed contracts, the resolution authorities are also given a statutory power4 to make rules (“Stay Rules”) to ensure that the terms and conditions of a contract entered into by a qualifying entity contain a provision to the effect that the contractual parties agree to be bound by the temporary stay provision under the FIRO. In the consultation paper, the HKMA sets out the details and scope of the Stay Rules it intends to make under the FIRO, in its role as the resolution authority for banking sector entities (also considering its role as the lead resolution authority for the relevant cross-sectoral groups).


In balancing the cost of compliance against the benefit afforded by a contractual recognition provision, the HKMA proposes to adopt a proportionate approach in the Stay Rules by narrowing the type of contracts as well as entities that will fall within the scope of the rules (as compared to the scope of its temporary stay power under the FIRO).


HKMA’s proposed scope of the Stay Rules


The HKMA proposes that a contract with all of the following features would fall within the scope of the Stay Rules as a “within scope contract”:


  • a contract entered into by a “covered entity”;

  • a contract that is a “covered financial contract”;

  • a contract that is governed by non-Hong Kong law;

  • a contract that contains a termination right; and

  • a contract where the counterparty is not a financial market infrastructure (including a central counterparty).


The proposed Stay Rules will require the appropriate contractual recognition provisions to be included in these two cases: (i) the entry into of new obligations under a within scope contract or (ii) any material amendment to any obligations under an existing within scope contract, once the Stay Rules come into force. The Stay Rules are not proposed to have retrospective effect; i.e. contractual recognition provisions are not required for existing obligations under a within scope contract that are already in place prior to the coming into force of the Stay Rules.


Covered entities


The HKMA proposes the following to be “covered entities” in scope of the Stay Rules


  • a Hong Kong-incorporated authorized institution (“AI”);

  • a Hong Kong incorporated holding company of a Hong Kong-incorporated AI; and

  • a group company of a Hong Kong incorporated AI (but only if the obligations of the group company under the covered financial contract are guaranteed or otherwise supported by the AI or the Hong Kong- incorporated holding company of the AI). 


Covered entities


While the FIRO empowers a resolution authority to exercise a temporary stay on relevant contracts entered into by a within scope FI (which, in the case of banks, include both HK- and non HK-incorporated AIs) and its group companies, the Stay Rules proposed by the HKMA are more limited in terms of entity scope and reflects the HKMA’s pragmatic approach. 


Covered financial contracts


The HKMA proposes to limit the range of contracts in scope of the Stay Rules to the following types of financial contracts (“covered financial contracts”):


  1. securities contracts, including: (i) contracts for the purchase, sale or loan of a security, a group or index of securities; (ii) options on a security or group or index of securities; (iii) repurchase or reverse repurchase transactions on any such security, group or index;

  2. commodities contracts, including: (i) contracts for the purchase, sale or loan of a commodity or group or index of commodities for future delivery; (ii) options on a commodity or group or index of commodities; (iii) repurchase or reverse repurchase transactions on any such commodity, group or index;

  3. futures and forwards contracts, including contracts for the purchase, sale or transfer of a commodity or property of any other description, service, right or interest for a specified price at a future date;

  4. swap agreements, including: (i) swaps and options relating to interest rates; spot or other foreign exchange agreements; currency; an equity index or equity; a debt index or debt; commodity indexes or commodities; weather; emissions or inflation; (ii) total return, credit spread or credit swaps; (iii) any agreements or transactions that are similar to an agreement referred to in point (i) or (ii) which are the subject of recurrent dealing in the swaps or derivatives markets; and

  5. master agreements for any of the contracts or agreements referred to in points (1) to (4) above.


On this basis, the Stay Rules would apply to a wide variety of financial contracts, including ISDA Master Agreements, Global Master Repurchase Agreements or Global Master Securities Lending Agreements.


Implementation Timetable


The HKMA’s current intention is to introduce the Stay Rules into the Legislative Council for negative vetting in the 2020/21 Legislative Session.


The HKMA proposes to phase in the implementation of the Stay Rules by counterparty types as follows:


  • For counterparties that are AIs, other foreign banks and entities that are part of a G-SIB group: 18 months from the effective date of the Stay Rules; 

  • For all other counterparties: 30 months from the effective date of the Stay Rules. 


Separately, the HKMA also welcomes respondents’ feedback on the merit of requiring contractual recognition provisions to give effect to, in addition to the temporary stay, the ongoing stay provision under the FIRO.


However, since the FIRO only empowers the HKMA to make rules regarding the temporary stay5, amendments will have to be made to the relevant section in the FIRO before such proposal can be implemented. As such, this proposal will not be included within the timing described above 



Covered financial contracts

The HKMA said it intends to liaise with ISDA to put in place an ISDA Jurisdictional Module for Hong Kong. This will be helpful for covered entities and their counterparties to comply with the Stay Rules with respect to those financial contracts covered by the ISDA Jurisdictional Modular Protocol (ISDA JMP). Contractual recognition language will have to be considered separately for those financial contracts that are not covered by the ISDA JMP. 




Compliance with the Stay Rules for AI groups will not simply be a case of establishing the classification of the in- scope covered entities but will also require a system to identify the classification of counterparties in order to determine the appropriate timeline. 



For further information, please contact:


Chong Liew, Partner, Linklaters



1  Section 89 of the FIRO.

2  Defined in sections 86 and 87 of the FIRO to mean a within scope FI or a group company of a within scope FI. 

3  Section 90 of the FIRO.

4  Section 92 of the FIRO.