In the wake of the global financial crisis, Hong Kong’s key financial regulators, the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA), have jointly issued a consultation paper (Paper) that outlines proposals for establishing a resolution regime for significant financial institutions (FIs) that are in crisis or likely to collapse.

The Paper announces proposals for establishing an effective resolution regime for FIs in Hong Kong. The proposals put forward to date are preliminary and intended to outline the general regulatory framework and guiding principles for the regime. There remain a number of key issues and details, including the operation of the resolution regimes, that need to be dealt with in the second and subsequent stages of the consultation process.

We set out below an overview of the proposed resolution regime outlined in the Paper. The second stage of consultation is expected to commence later in 2014.

Background for Establishing an Effective Resolution Regime

After the recent global financial crisis, it was widely recognised that many jurisdictions needed to improve their regulatory and legal capacity to cope with the failure of a large FI and to contain its impact on financial stability and society as a whole.

As an international financial centre and a member of the Financial Stability Board, Hong Kong proposes to establish an effective resolution regime in keeping with the Board’s standards. The proposed resolution regime aims to enable authorities in Hong Kong to rapidly bring about orderly resolution for the failure of significant FIs in times of financial crisis, and to ensure that the costs of such failure are borne by the shareholders and creditors of the failing FI, rather than out of public funds.

Scope of the Resolution Regime

The Paper proposes a single cross-sector resolution regime with certain sector specific provisions. The proposed scope of the resolution regime is broad and covers:

  • all types of authorized banking institutions, including licensed banks, restricted licensed banks and deposit-taking companies;
  • certain licensed corporations, including licensed corporations providing certain critical financial services or relevant regulated activities and exceeding a minimum size threshold, as well as licensed corporations which are branches or subsidiaries of Global Systemically Important Financial Institutions (G-SIFIs);
  • certain insurers, including the local operations of any G-SIFIs, internationally active insurance groups with a presence in Hong Kong or any insurers which are assessed to be systemically significant or critical to Hong Kong; and
  • financial market infrastructures under the oversight of the HKMA or recognised as clearing houses under the Securities and Futures Ordinance.

The Paper also proposes that the scope of the resolution regime should be extended to cover local branches of foreign FIs so as to facilitate the resolution undertaken by the home authority of a foreign FI or to support the resolution imposed on the local branch. Moreover, it is proposed that the resolution regime should empower the relevant authority to act in relation to the locally incorporated holding companies of FIs and the affiliated operational entities providing essential supporting services (such as information technology services) to FIs.

Resolution Authorities and Leading Resolution Authority

The Paper proposes that each of the key regulators – the HKMA, SFC and IA – would act as resolution authorities for FIs within their area of interest.

A leading resolution authority will be appointed to coordinate resolution in cases where a failing FI operates in multiple sectors in the financial system. More details about the appointment of the leading resolution authority will be set out in the second stage consultation.

Conditions of Initiating a Resolution

Resolution would only be used as a last resort. It is proposed that the resolution authority could only initiate a resolution when it is assessed that both of the following conditions are met:

  • Non-viability condition: when it is assessed that a FI is, or is expected to become, unable to satisfy the conditions set for carrying on its regulated business and activities (whether on financial or non-financial grounds) and there is no reasonable prospect of other action being taken (outside of resolution) in order to satisfy such conditions within a reasonable timeframe; and
  • Financial stability condition: when it is assessed that resolution will contain risks posed to the continuity of critical financial services and general financial stability.

Resolution Objectives

The Paper proposes the following objectives to which the resolution authority must have regard when exercising its resolution powers and deciding which resolution option to take in a particular case:

  • to promote and maintain the general stability and effective working of the financial system in Hong Kong including by securing the continuity of critical financial services, including payment, clearing and settlement functions;
  • to provide a measure of protection to depositors, investors and insurance policyholders; and
  • subject to the first two resolution objectives, to contain the costs associated with resolution and protect public funds.

Resolution Options and Powers

The Paper proposes a range of resolution options and powers for resolution authorities. These include:

  • Compulsory transfer to another FI: the resolution authority may determine to sell and transfer a failing FI in its entirety, or some or all of its business, to another FI which is willing and able to continue it;
  • Compulsory transfer to a bridge institution: The resolution authority may transfer the business of a failing FI to a temporary bridge institution which will take on and continue the failing FI’s activities associated with the provision of critical financial services. The option may be used when a third party acquirer cannot be immediately found, and allows the resolution authority time to find a more permanent solution;
  • Statutory bail-in: The resolution authority may restructure the liabilities of a failing FI in an attempt to restore its viability such that it might continue the provision of critical financial services. The resolution authority would be able to write down the shareholders and certain unsecured creditors in a way that generally respects the hierarchy of claims in liquidation, and to impose a debt-for-equity swap on certain unsecured creditors to bring about a recapitalisation of the failing FI:
  • Temporary public ownership: The Government or the resolution authority may take temporary control of a failing FI and make changes to its structure and operations before implementing one of the other options noted above or allowing it to resume normal business. This option is intended to be used as a last resort if other options will not adequately protect financial stability;
  • Transfer to an asset management vehicle: The resolution authority may transfer assets and liabilities of a failing FI to an asset management vehicle(s) for their management and eventual sale or orderly wind-down. This option may be used in cases where it is appropriate to deal with the residual parts of a failing FI (such as parts which are not directly associated with the provision of critical financial service and do not need to be continued for protecting financial stability) by means of insolvency proceedings.

The resolution authority will also be given a number of general resolution powers, including the power to take control of and manage an FI in resolution. It is also proposed that the entry into resolution, or the exercise of any resolution powers, should not trigger statutory or contractual set off rights or constitute an event that entitles any counterparty of the failing FI to exercise early termination rights (covering contractual acceleration, termination and other close-out rights), provided that the substantive obligations under the contract continue to be performed. For example, it is envisaged that a counterparty of the failing FI would not be permitted to exercise early termination rights because the business of a failing FI is being acquired or transferred to a bridge institution. The exact nature of the powers in respect of such early termination rights are expected to be addressed in the second stage of consultation.

Interaction with the existing corporate insolvency regime

To manage the risk that a third party may seek to pre-empt or frustrate the resolution proceedings, it is proposed that any person intending to petition for the winding-up of an FI would be required to notify the resolution authority before winding-up procedure can commence. The resolution authority will be permitted a set period of time to decide whether to initiate resolution. The petition presented would be stayed until the set period of time expires and the resolution authority confirms that it has decided not to initiate resolution.


The exercise of resolution powers by the resolution authority might affect the contractual and property rights of a number of parties including the creditors of a failing FI. The Paper proposes a number of safeguards to protect those parties affected by resolution, including:

  • respecting the statutory creditor hierarchy, and departing from the pari passu treatment of creditors of the same class only where it is justified by the resolution objectives;
  • compensating the creditors that are worse off than in liquidation; and
  • protecting certain financial arrangements, including security, set off and netting arrangements.

Cross-border resolution and international cooperation

The Paper proposes a coordinated approach to cross-border resolution, and that the mandate for the local resolution authority should expressly permit and encourage cooperation with a foreign resolution authority on relevant matters.

It is further proposed that the local resolution authority should be able to use the local resolution regime in cases where:

  • a foreign resolution authority (which regulates the parent company of a cross-border FI) is initiating resolution in relation to a cross-border FI whose Hong Kong operations are within the scope of the local regime; and
  • the resolution approach which the foreign resolution authority proposes to adopt will deliver outcomes that are consistent with the resolution objectives and will not disadvantage local creditors relative to foreign creditors.

Further details on the arrangements for international cooperation will be set out in the second stage consultation.

Next steps

The first stage of the consultation process concluded in early April 2014. The second stage consultation is expected to commence later this year. At this stage, the bill for the resolution regime is expected to be introduced into the Legislative Council during 2015.


The proposed resolution regime will affect local and foreign financial institutions (and their creditors, shareholders and parties who contract with them), international insurance companies, and liquidators and insolvency practitioners dealing with failing FIs. Those organisations should consider participating in the second stage of the consultation process.