The Financial Services and the Treasury Bureau, jointly with the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA) (together, Authorities) published their conclusions on the consultation relating to the proposed regulations on protected arrangements (PARs) under the Financial Institutions (Resolution) Ordinance (Ordinance) on 6 April 2017.

The Ordinance was enacted by the Legislative Council (LegCo) on 22 June 2016. It sets out the framework for a cross-sector regime for the orderly resolution of failing financial institutions (FIs) in Hong Kong (see our earlier e-bulletin for an overview of the regime).

Before the Ordinance commences operation, necessary subsidiary legislation under the Ordinance needs to be formulated and passed. On 22 November 2016, the Authorities published a consultation paper in relation to the PARs to be made under section 75 of the Ordinance (Consultation Paper) (see our earlier e-bulletin for an overview of this consultation paper). The Consultation Paper invited views on the scope and the degree of protection for the different classes of protected arrangements in a partial property transfer (PPT) or bail-in situation, as well as the remedial actions to be taken by a resolution authority should its actions inadvertently result in the constituent parts of a protected arrangement being treated otherwise than as envisaged in the regulations.

The consultation ended on 21 January 2017. Respondents were broadly supportive of the policy intent behind the PARs and provided constructive and technical input on the questions posed in the Consultation Paper. This e-bulletin provides an overview of the key feedback from the respondents and the conclusions reached by the Authorities.


Clearing and settlement systems arrangements

Most respondents generally supported the broad scope of protection to clearing and settlement systems arrangements in a PPT by restricting a resolution authority from transferring some but not all of the assets, rights, or liabilities in a way that will disrupt the operation of a clearing and settlement systems arrangement. There were suggestions to extend the protection to clearing arrangements with a clearing house that is not a recognised clearing house (RCH) under the Securities and Futures Ordinance (SFO) but is authorised as an automated trading service under the SFO. The Authorities considered that the scope of protection need not be extended given that clearing arrangements with a non-RCH would fall under the broad definitions of set-off arrangement, netting arrangement and secured arrangement, the protection of which is separately provided for.

There was also a query as to how the resolution proceedings would interact with proceedings of the RCH, including its default rules under section 45(1)(e) of the SFO. The Authorities stated that they are prepared to further consider conferring overriding protections to RCHs and their operations, so that resolution actions taken by resolution authorities will not affect transactions and actions undertaken by RCHs. For the sake of clarity and certainty, the PARs will also specify the specific arrangements of a RCH or a designated clearing and settlement system which a resolution authority should seek not to disrupt in transferring assets, rights or liabilities under a PPT.

There were also concerns as to the impracticality of reversing actions already performed as a consequence of a resolution authority inadvertently acting in a manner inconsistent with the objectives of the PARs. However, the Authorities remain of the view that it is appropriate to provide a backstop mechanism such that the operations of clearing and settlement systems arrangements could continue as if the purported transfer had not taken place.

Secured arrangements

Respondents agreed with the proposed approach to protecting secured arrangements, ie, a resolution authority cannot transfer any constituent part of a legitimate secured arrangement, without all other corresponding constituent parts, whether or not the security is by means of a fixed or floating charge.

It is clarified that “legitimate” secured arrangements mean secured arrangements which are made not in contravention of any restriction imposed by or under a Hong Kong ordinance.

Structured finance arrangements

Respondents agreed with the proposed approach to protecting structured finance arrangements, ie, a resolution authority cannot transfer some (but not all) of the property, rights and liabilities which are or form part of a structured finance arrangement.

The Authorities clarified that the proposed PARs apply to the class of structured finance arrangements that are securitisations, including both true sale securitisations and synthetic securitisations.

Set-off, netting and title transfer arrangements

Respondents generally agreed with the overall approach to protecting set-off, netting and title transfer arrangements in a PPT.

Having considered the respondents' comments, the Authorities:

  • intend to maintain the approach proposed in the Consultation Paper, which is broadly similar to that in the UK;

  • explained that the PARs apply to set-off, netting and title transfer arrangements that are documented or otherwise evidenced in writing, including where held electronically;

  • clarified that while the PARs protect core netting sets for transactions entered into pursuant to master agreements that are relied upon for regulatory capital calculation, they do not protect broad set-off rights under “sweeper clauses”;

  • clarified that the PARs do not intend to unpick the provisions of any master agreement such that the “flawed asset” provision under section 2(a)(iii) of the 2002 International Swaps and Derivatives Association Master Agreement would oust the protection to be afforded to the core close-out netting sets under those agreements; and

  • intend to add a further exclusion to ensure that receivables owed by depositors, unless related to a financial contract, will be excluded from protection afforded to set-off, netting and title transfer arrangements.

2. Safeguards in bail-in

Most respondents agreed that PARs should provide a safeguard that a resolution authority should only make bail-in provision in respect of the net amount that the entity in resolution and its counterparty are entitled by contract to set-off or net under any set-off, netting and title transfer arrangements.

There was a concern that in the event that a resolution authority did not act consistently with the objective of the PARs, and measures subsequently put in place to seek to restore the affected parties' position would create legal, contractual and regulatory capital uncertainties. The Authorities explained that the PARs will provide for a mechanism to cater for such uncertainties (including modelling on the relevant UK legislation and designing dedicated loss-absorbing capacity requirements for FIs), and that they will continue to refine the processes and procedures to ensure an effective implementation of the PARs via effective use of the legal tools available under the Ordinance.


In response to comments from some respondents, the Authorities will modify the definitions of “derivative contract”, “financial contract” and “qualifying master agreement” so that they are more precise as to the population of contracts that are covered by the PARs in relation to bail-in, without excessively constraining a resolution authority's ability to execute a resolution within a short period of time.


In light of the broad support from the respondents, a large majority of the original proposals will be maintained. The Authorities aim to table the draft PARs in the LegCo in the second quarter of 2017, with a view to bringing the Ordinance and the PARs into operation within 2017.

Thereafter, the Authorities will continue to develop the resolution rules, regulations, standards and guidance, with the objective of enhancing the resolvability of in-scope FIs. Stakeholders will be consulted in due course. We will be providing further updates as and when developments arise.