March 16, 2018
By electronic submission to [email protected]
Consultation on AI LAC Rules
Resolution Office
Hong Kong Monetary Authority
55th Floor
Two International Finance Centre
8 Finance Street, Central, Hong Kong
Re: Hong Kong Monetary Authority’s Consultation Paper on Loss-Absorbing Capacity Requirements for Authorized Institutions
Ladies and Gentlemen:
The Clearing House Association (“TCH”)1 and the Securities Industry and Financial Markets Association (“SIFMA”)2 welcome the opportunity to respond to the request of the Hong Kong Monetary Authority (the “MA”) for comment on proposed rules on loss-absorbing capacity (“LAC”) requirements for authorized institutions (“AIs”) (the “AI LAC Proposal”). The AI LAC Proposal sets forth the MA’s approach to setting requirements for LAC issued externally by a resolution entity (“external LAC”) and internally within a resolution group (“internal LAC”).3
The AI LAC Proposal states that it has been designed in light of relevant international standards, including the international total loss-absorbing capacity (“TLAC”) standard established by the Financial Stability Board (the “FSB”) and approaches taken in certain other jurisdictions that have adopted, or are in the process of adopting, LAC requirements for banking groups.4 In issuing the AI LAC Proposal, the MA notes that “[a] new regime is needed that provides for the failure of a bank to be managed in an orderly way that allows for the functions of the bank to continue to be performed, avoids disruption to financial stability, and minimises the risk to public funds. An important element of such a regime is ensuring that, should a bank fail, it has sufficient financial resources of its own to absorb losses and be re-capitalised.”5 The MA’s AI LAC Proposal works to achieve this purpose, with external LAC representing the “financial resources external to a resolution group that are available to absorb losses and fund recapitalisations within a resolution group,” and internal LAC enabling the passage of “losses up from the AI in which they first crystallise to a resolution entity, whose external LAC can then absorb the losses.”6
We support certain key components of the MA’s AI LAC Proposal, which we believe make a significant positive contribution to the efforts undertaken in recent years by firms and regulators in many jurisdictions to achieve a durable end to the risk of “too big to fail” (“TBTF”). We believe that the MA should further consider those efforts, and particularly the progress made by the U.S. regulators and the U.S. global systemically important banking groups (“G-SIBs”), when adopting its final rules on AI LAC. As you know, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the U.S. G-SIBs have taken a variety of legal, regulatory and practical steps to make the single-point-of-entry (“SPOE”) resolution of the U.S. G-SIBs feasible. These actions include requiring the U.S. G-SIBs to comply with certain external TLAC and clean holding company requirements.7 Those requirements are designed to ensure that the U.S. G-SIBs have sufficient contributable assets8 at the top of the groups to recapitalize all their material subsidiaries, including any material Hong Kong subsidiaries, if the top-tier parent is put into a bankruptcy or special resolution proceeding.
1 The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853. The Clearing House Association L.L.C. is a nonpartisan organization that engages in research, analysis, advocacy and litigation focused on financial regulation that supports a safe, sound and competitive banking system. Its affiliate, The Clearing House Payments Company L.L.C., owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by launching a new, ubiquitous, real-time payment system. The Payments Company is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume.
2 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets
Association (GFMA). For more information, visit www.sifma.org.
3 Consultation paper on rules for loss-absorbing capacity requirements for authorized institutions (Jan. 2018), available at http://www.hkma.gov.hk/eng/key-functions/banking-stability/resolution/resolution-publications/.
4 See AI LAC Proposal at ¶ 9 (“In developing policy on LAC requirements for AIs, the MA has reviewed relevant international standards, and the approaches taken in certain other jurisdictions that have adopted, or are in the process of adopting, rules on [LAC] requirements for banks. Particular regard has been given to the FSB’s guidance on [TLAC] . . . and on internal TLAC . . . and also to the approaches taken under the EU’s Bank Recovery and Resolution Directive . . . (including in the UK) and in the US”).
5 Id. at Executive Summary.
6 Id. at ¶¶ 13-14.
7 See Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations, 82 Fed. Reg. 8266 (Jan. 24, 2017), available at https://www.gpo.gov/fdsys/granule/FR-2017-01-24/2017-00431 (“TLAC Rule”).
8 Contributable assets include any assets that could be contributed to material subsidiaries, including intercompany receivables and HQLA.