Financial Services Risk and Regulation · the impact of the coronavirus disease (Covid-19) on the global banking system. In line with this revised timeline announced by the GHOS,

Financial Services Risk and Regulation

Regulatory updates newsletter

April 2020

Regulatory Updates New sletter — April 2020 Pw C · 2

Introduction HKMA Updates on Cov id-19

Regulatory Measures

SFC Updates on Cov id-19

Regulatory Measures

IA Updates on Cov id-19

Regulatory Measures

HKMA circular on ref orm of

interest rate benchmarks

LIBOR Ref orm Updates Other Regulatory Updates Glossary

Content DashboardRegulatory Updates Page Number Banking Asset Management Insurance

HKMA Updates on Covid-19 Regulatory Measures• Deferral of Basel III implementation and HKMA’s supervisory actions in response to Covid-19

• Liquidity measures in response to Covid-19 outbreak

• 100% Loan Guarantee Product under SME Financing Guarantee Scheme

4

HKMA Updates on Covid-19 Regulatory Measures• Update on regulatory reserve

• Pre-approved Principal Payment Holiday Scheme for Corporate Customers

• Launch of US Dollar Liquidity Facility

• Postponement of 2020 Supervisor-Driven Stress Test

• Other (BCBS) measures to reflect the impact of Covid-19

5

HKMA Updates on Covid-19 Regulatory Measures• Enhanced Anti-Money Laundering and Counter Financing of Terrorism measures

6

SFC Updates on Covid-19 Regulatory Measures• Extended deadlines for implementation of regulatory expectations

• Compliance w ith order recording requirements

• Reminder to management companies and trustees and custodians of SFC-authorized funds

• Reminder of important obligations to ensure suitability and timely dissemination of information to clients

7

SFC Updates on Covid-19 Regulatory Measures• Reminder to issuers of SFC-authorized paper gold schemes

• Reminder to management companies and market makers of SFC-authorised exchange traded funds

8

IA Updates on Covid-19 Regulatory Measures• Phase 2 of the temporary facilitative measures to tackle the outbreak of COVID-19

• Submission of statutory, actuarial and financial returns

9

HKMA circular on reform of interest rate benchmarks 10

LIBOR Reform Updates 11

Other Regulatory Updates:• Joint SFC, HKEX and FSR consultation conclusions on the model for an uncertif icated securities market

• SFC Report on leveraged foreign exchange trading activities carried out by licensed corporations

• Amendment to Mutual Recognition of Funds (MRF) betw een Netherlands and Hong Kong

• IA premium levy rate to be adjusted to 0.085%

12

Emily LamPartner

+852 2289 1247PwC HK FS Risk and Regulation


The financial services regulators have been extremely proactive in launching wide range of measures to limit the negative economic impact of the COVID-19 crisis in Hong Kong. It is imperative for financial institutions to also take pre-emptive actions to survive the expected pro-longed period of challenge.

Additionally, we have launched a COVID-19 regulatory blog to provide an overview of supervisory measures in reaction to the Corona crisis from around the globe. You can access this blog at

https://pwc.to/2XZZhnZ

In other key regulatory developments in Hong Kong, the Insurance Authority granted authorisation to the third virtual insurer under Fast Track. This indicates positive development in the financial services sector and growth both in terms of services and innovation in the industry.

For this edition of our monthly regulatory newsletter, we highlight the following updates:

• HKMA Updates on Covid-19 Regulatory Measures, including:

o Deferral of Basel III implementation and

HKMA’s supervisory actions in

response to Covid-19

o Enhanced liquidity measures in

response to Covid-19 outbreak

o 100% Loan Guarantee Product under

SME Financing Guarantee Scheme

o 50% reduction of regulatory reserve

o Pre-approved Principal Payment

Holiday Scheme for Corporate

Customers

o Launch of US Dollar Liquidity Facility

o Enhanced Anti-Money Laundering and

Counter Financing of Terrorism

measures

• SFC Updates on Covid-19 Regulatory Measures, including:

o Extended deadlines for implementation

of regulatory expectations

o Compliance w ith order recording

requirements

o Reminder to management companies

and trustees and custodians of SFC-

authorised funds

o Reminder of important obligations to

ensure suitability and timely

dissemination of information to clients

o Reminder to issuers of SFC-authorised

paper gold schemes

o Reminder to management companies

and market makers of SFC-authorised

exchange traded funds

• IA Updates on Covid-19 Regulatory Measures, including:

o Phase 2 of the temporary facilitative

measures to tackle the outbreak of

COVID-19

o Submission of statutory, actuarial and

f inancial returns

• HKMA circular to share the results of an earlier survey on reform of interest rate benchmarks.

• LIBOR Reform Updates: ARRC announces recommendation of a spread adjustment methodology for cash products, IASB proposes further amendments to IFRS Standards in response to interest rate and ISDA announces preliminary results of consultation on pre-cessation fallbacks for LIBOR.

• Other regulatory updates section includes joint SFC, HKEX and FSR consultation conclusions on the model for an uncertificated securities market the recent SFC Report on leveraged foreign exchange trading activities carried out by licensed corporations, Amendment to MRF between Netherlands and Hong Kong and IA premium levy rate to be adjusted to 0.085%.

We hope you find our summary of these regulatory updates useful and we look forward to your feedback.

Emily LamFS Risk and Regulation Leader+852 2289 [email protected]

Introduction


Regulatory Measures


Regulatory Measures


Regulatory Measures




https://pwc.to/2XZZhnZ


HKMA Updates on Covid-19 Regulatory Measures

Deferral of Basel III implementation and HKMA’s supervisory actions in response to Covid-19

On 27 March 2020, the oversight body of the BCBS, the Group of Central Bank Governors and Heads of Supervision (GHOS), deferred of the implementation of the final Basel III reform package by one year to 1 January 2023.

This was done to provide additional operational capacity for banks and supervisors to respond to the immediate financial stability priorities resulting from the impact of the coronavirus disease (Covid-19) on the global banking system.

In line with this revised timeline announced by the GHOS, the HKMA will defer the implementation of the Basel III final package, including

• Revised frameworks on credit risk, operational risk, output floor and leverage ratio

• Revised market risk framework

• Revised credit valuation adjustment (CVA) framework

Enhanced liquidity measures in response to Covid-19 outbreak

• Liquidity Facilities Framework: While funding under the Standby Liquidity Facilities (SLF) is normally provided

for a term of up to one month, the HKMA will consider automatically rolling it over for additional term(s) to meet the longer-term funding requirement of individual AIs.

• Federal Reserve’s Temporary FIMA Repo Facility: The HKMA, as one of the FIMA account holders, may enter into repurchase agreements with the Federal Reserve and temporarily exchange the US Treasuries held by the HKMA for US dollars, which can then be made available to AIs in Hong Kong. The Facility will last for at least six months starting from 6 April 2020.

• Utilisation of liquidity buffers under the LCR and LMR regimes: Category 1 institution may monetise its HQLA under certain circumstances even though this may cause the institution to maintain an LCR less than that required under rule 4 of the BLR. For Category 2 institutions, the requirement of maintaining the LMR above 25% on a monthly average basis entails that there may be temporary variations in the ratio so long as the monthly average ratio remains above the minimum requirement.

• Operational readiness: AIs should, as

a matter of priority, put in place internal policies and procedures for using the HKMA’s liquidity facilities, especially the SLF.

100% Loan Guarantee Product under SME Financing Guarantee Scheme

The HKMA has set out the policy intent on the relevant regulatory treatments in respect of a loan granted by any participating AI to an eligible SME borrower under the 100% Scheme. Key highlights are:

• BELR: for the exposure to the HKMCI arising from any loan to an SME which is covered by the HKMCI guarantee under the 100% Scheme, the amount so covered is deducted from the AI’s exposures to the HKMCI.

• BCR: STC banks to regard the cover of the Government’s commitment for the 100% Scheme to be adequate and effective for the purposes of credit risk mitigation. IRB banks should seek the HKMA's exemption approval to apply the STC approach to 100% guaranteed exposures.

• SPM module CR-G-7: AIs to treat any loan to an SME which is covered by the respective HKMCI guarantee as "secured“.

Brian YamPartner

+852 2289 [email protected]

Emily LamPartner



Regulatory Measures


Regulatory Measures


Regulatory Measures






50% reduction on Regulatory Reserve (RR)

In view of the diminishing need for locally incorporated AIs to maintain an RR on top of accounting provisions and to provide AIs with a greater lending headroom to support customers to cope with the COVID-19 outbreak, the HKMA has decided to lower the RR requirement on AIs by 50% with immediate effect.

Pre-approved Principal Payment Holiday Scheme for Corporate Customers

The HKMA in consultation with the Banking Sector SME Lending Coordination Mechanism has developed a Pre-approved Principal Payment Holiday Scheme, in which participating institutions will pre-approve deferment of loan principal payments falling due between 1 May 2020 and 31 October 2020 of eligible small-to-mid-sized corporates for up to 6 months. The key highlights are:

• All corporate borrowers that have an annual sales turnover of HK$800 million or less and have no outstanding loan payments overdue for more than 30 days are eligible for the Scheme.

• Applications by borrowers are not required to provide timely financial relief to corporates.

• Deferments of principal payments under the Scheme will not by themselves render a loan account to be downgraded to a lower category.

• AIs must dedicate sufficient resources to implement the Scheme. They must inform eligible customers before the end of April, with priority given to customers that have principal payments falling due soon after 1 May 2020. The notice should request eligible customers to contact the AI within 14 days.

• For corporate customers not currently covered by the Scheme or have payment falling due before 1 May 2020, the HKMA expects AIs to pro-actively reach out to them to understand if they require similar assistance.

Launch of US Dollar Liquidity Facility

The HKMA introduced the temporary US Dollar Liquidity Facility (the “Facility”) on 22 April. The HKMA launched the Facility to make available US dollar liquidity for licensed banks (LBs) to help meet their US dollar funding needs. Starting from 6 May 2020, the HKMA will conduct a competitive tender every week for LBs to submit bids for US dollar liquidity. US dollar liquidity will be provided to LBs in the form of repurchase transactions for a term of 7 days.

Postponement of 2020 Supervisor-Driven Stress Test

To provide additional operational capacity for banks to respond to the challenges brought by the outbreak and to continue to support their customers, the HKMA has decided to postpone the 2020 SDST by one year to 2021. In making this decision, the HKMA has taken into consideration the current capital levels of banks and the satisfactory results of earlier stress tests.

Other (BCBS) measures to reflect the impact of Covid-19

The BCBS has issued guidance to ensure that banks reflect the risk-reducing effect of the exceptional measures when calculating their capital requirements. It also sets out the amended transitional arrangements for the regulatory capital treatment of expected credit loss (ECL) accounting, which will provide jurisdictions with greater flexibility in how to phase in the impact of ECL on regulatory capital.

In addition, the BCBS and the IOSCO have revised the framework for margin requirements for non-centrally cleared derivatives. The revision extend by one year the final two implementation phases of the margin requirements with the final implementation phase now taking place on 1 September 2022.

Brian YamPartner


Emily LamPartner


Introduction HKMA Updates on Cov id-

19 Regulatory Measures


Regulatory Measures


Regulatory Measures

Joint SFC, HKEX and FSR consultation

conclusions on the model f or an

uncertif icated securities market

LIBOR Ref orm

Updates

Other Regulatory

Updates

Glossary



Enhanced Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) measures

HKMA issued two circulars on 7 April 2020 to share observations gathered through its recent engagement with AIs and stored value facility (SVF) licensees, respectively. The circulars set out the type of support, guidance and assistance in relation to money laundering and terrorist financing (ML/TF) risk management that the HKMA is providing to support swift and effective implementation of measures in response to COVID-19.

Remote on-boarding and simplified due diligence

• Where AIs identify lower ML/TF risks, the Anti-Money Laundering and Counter Terrorist Financing Ordinance, and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (for AIs) issued by the HKMA, allow simplified due diligence measures to be taken, which may help AIs adapt to the current situation.

• HKMA believes the provision of remote account opening and the use of financial technology (FinTech) will

provide significant opportunities to manage some of the challenges presented by the current situation.

• Flexibility has been built into the risk-based approach, as set out in the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (for SVF Licensees); SVF licensees may conduct CDD measures commensurate with the lower ML/TF risks of many SVF products based on their stored values, transaction limits and functions.

Remaining vigilant to COVID-19 related financial crime risks

• In line with FATF’s observations, it has become apparent that criminals are taking advantage of COVID-19 to perpetrate a number of fraud and exploitation scams, some of which have impacted Hong Kong (e.g. face mask scams).

• While AIs and SVF licensees continue to work closely with the HKMA and assist law enforcement agencies’ investigations to deter such scams and recover assets concerned, it is important that AIs and SVF licensees should remain vigilant to emerging ML/TF risks and ensure that they

continue to focus on priority areas and effectively mitigate risks through information sharing and detecting and reporting suspicious transactions to the Joint Financial Intelligence Unit (JFIU).

Ongoing outreach and advice

• Where there is a short-term impact on an AI’s or a SVF licensees' ability to meet a particular obligation, the AI and / or SVF licensee concerned should maintain a record of the circumstances, the risk assessment that has been performed as well as any mitigation measures being taken.

• The HKMA is using its supervisory tools flexibly in this period and reiterates that its risk-based approach to AML/CFT supervision does not require or expect a “zero failure” outcome.

Hokee FuPartner





Regulatory Measures


Regulatory Measures




LIBOR Ref orm

Updates

Other Regulatory

Updates

Glossary


SFC Updates on Covid-19 Regulatory Measures

Extended deadlines for implementation of regulatory expectations

The SFC has extended the deadlines for implementation of the following regulatory expectations by six months

• Use of external electronic data storage (“EDSP”): Deadline extended from 30 June 2020 to 31 December 2020; where a data centre of an EDSP used by a LC has been approved under section 130 of the SFO before 31 October 2019, the LC’s provision of the documents to the SFC’s Licensing Department set out in paragraph 25 of the Circular issued in October 2019

• New measure to protect client assets: Deadline extended from 31 July 2020 to 31 January 2021; where intermediaries are required to have the countersigned acknowledgement letters from relevant banks in place before depositing any client money or securities into any new client asset accounts

• Data standards for order life cycles: Deadline extended from 31 October 2020 to 30 April 2021; where in-scope brokers are expected to implement system changes and make other arrangements needed for compliance with the data standards

Compliance with order recording requirements

The SFC understands that many intermediaries have provided their staff with remote access to order management systems, which are capable of centralisedorder recording for orders placed from a remote location. However, some intermediaries may encounter challenges in ensuring compliance with the order recording requirements set out in paragraph 3.9 of the Code of Conduct, which provides that a licensed or registered person should:

• Record and immediately time stamp records of the particulars of the instructions for agency orders and internally generated orders.

• Use a telephone recording system to record the instructions and maintain telephone recordings as part of its records for at least six months.

Reminder to management companies and trustees and custodians of SFC-authorized funds

In view of the volatility in local and international markets caused by the COVID-19 outbreak, management companies are reminded by the SFC to:

• closely monitor the dealing and trading of the funds under their management

• keep investors informed at all times and immediately report to the SFC any untoward circumstances

• ensure that all assets of the funds are fairly and accurately valued in good faith and in the best interests of investors and in accordance with the constitutive and offering documents as well as applicable laws and regulations

• consider the need for any fair value adjustment

• exercise due care, skill and diligence in managing liquidity of funds

• use appropriate liquidity risk management tools (such as swing pricing or anti-dilution levy) to properly allocate the costs of redemption (such as transaction costs for liquidation of assets) to the redeeming investors, and to ensure fair treatment to investors who remain in the funds.

Trustees and custodians are also reminded of their duty to safeguard fund assets and provide independent oversight of the management of funds, for example, on valuation of the funds and use of liquidity risk management tools.

Carlyon Knight-EvansPartner


Helen LiPartner



Regulatory Measures


Regulatory Measures


Regulatory Measures





SFC Updates on Covid-19 Regulatory Measures

Reminder of important obligations to ensure suitability and timely dissemination of information to clients

This circular reminds licensed and registered persons of their obligations under the Code of Conduct when distributing investment products, such as funds and bonds, to their clients. In particular, these include

(i) the suitability obligations when they make a solicitation or recommendation

(ii) the obligation to disseminate information in a timely manner where they hold an investment product directly or indirectly on behalf of their clients

Reminder to issuers of SFC-authorized paper gold schemes (PGS Issuers)

In view of the recent volatility in markets caused by the COVID-19 outbreak, PGS Issuers are reminded in particular, for any decisions to suspend dealings of the PGS, PGS Issuers are reminded that:

• such decisions should be made in the best interests of investors in accordance with the constitutive and offering documents of the PGS and applicable laws and regulations;

• they should inform IPD/SFC immediately upon any decision to suspend and they should notify

investors in a timely manner;

• they should regularly review any prolonged suspension of dealings and take any necessary steps to resume normal operations as soon as practicable;

• they should notify IPD/SFC as well as investors immediately upon any decision to uplift suspension/resume dealing; and

• the offering documents of the PGS should contain information necessary for investors to make an informed judgement about the PGS.

Reminder to management companies and market makers of SFC-authorized exchange traded funds

The SFC noted that recently, the sole market maker of an ETF temporarily suspended its market making functions for such ETF because some of its traders were under mandatory quarantine due to COVID-19 outbreak. This has raised concerns as to whether the management company and market maker(s) of an ETF are sufficiently prepared to manage this risk. To ensure the trading of SFC-authorized ETFs is conducted in a fair and orderly manner, the management company of an ETFs is reminded to:

• conduct due diligence on and regular

monitoring of market maker(s)

• closely monitor the secondary market trading and liquidity of the ETFs under its management

• maintain a close dialogue with each market maker with whom the management company has engaged

• properly manage the risk of reliance on a single market maker to provide secondary market liquidity for an ETF

• be fully aware of and comply with the administrative arrangements and other requirements

• give the SFC early alerts of any untoward circumstances relating to the ETFs under its management.

Carlyon Knight-EvansPartner


Helen LiPartner





Regulatory Measures


Regulatory Measures




LIBOR Ref orm

Updates

Other Regulatory

Updates

Glossary


Insurance Authority Updates on Covid-19 Regulatory Measures

Phase 2 of the temporary facilitative measures to tackle the outbreak of COVID-19

Following Phase 1 of the temporary facilitative measures (“TFM”) to obviate the need to conduct face-to-face (“F2F”) meetings to minimize the risk of infection during the sales process of insurance policies, the IA rolled out Phase 2 of the TFM in view of the current pandemic situation and after consultation with the industry.

On top of Qualifying Deferred Annuity Policy (QDAP) and Voluntary Health Insurance Scheme (VHIS) products covered in the first phase of the temporary facilitative measures, the second phase now also covers additional protection type products, including term policies, and certain refundable or renewable policies that provide insurance protection (such as hospital cash, medical, critical illness, personal accident, disability or long-term care cover).

With immediate effect until 30 June 2020, insurers and intermediaries are allowed to distribute those life insurance products through non-face-to-face methods. Measures have been put into place to ensure that the interests of policy holders and potential policy holders are not adversely affected, including mandatory upfront disclosure at the point-of-sale and an extended cooling-off period of no less than 30 calendar days.

Submission of statutory, actuarial and financial returns

Authorized insurers are required to submit annually various statutory, actuarial and financial returns to the Insurance Authority (“IA”). These returns will facilitate the assessment of the financial condition of authorized insurers and the

compilation of statistics by the IA.

To facilitate the submission process, the IA has developed a set of spreadsheet-based templates to assist insurers with the completion of returns and compliance with relevant requirements. The enhancements serve to streamline and standardise the information submitted by insurers, and enable insurers to demonstrate the effectiveness of their compliance and control processes. The IA has also developed a best practice note to facilitate the ongoing preparation of the Actuary’s investigation report required under Section 18 of the Ordinance.

If authorized insurers anticipate difficulties in meeting the submission deadlines given the current COVID-19 situation, they should let their case officers know as soon as possible, with the documents involved and the extension required.

Billy WongPartner



Regulatory Measures


Regulatory Measures


Regulatory Measures





The HKMA issued a circular on 23 April to share the results of an earlier Survey on Reform of Interest Rate Benchmarks (the survey) and update on the latest developments relating to the reform.

The key highlights of the survey launched in November 2019 to monitor the banking sector’s progress in preparing for the transition to alternative reference rates (ARRs) are:

• The survey results indicate that there were HK$4.5 trillion of assets and HK$1.6 trillion of liabilities in the Hong Kong banking system referencing the LIBOR at the end of September 2019, representing about 30% and 11% respectively of the banking system’s total assets and total liabilities denominated in foreign currencies.

• Additionally, there were derivatives contracts involving an aggregate amount of HK$35 trillion in notional value referencing LIBOR.

• Around one-third of these LIBOR-linked assets and liabilities, and almost half of these derivatives contracts would mature after end-2021 and did not have adequate fall-back provisions.

• Regarding AIs preparation for transition to ARRs, many AIs had established a committee or appointed a senior executive to oversee the preparatory work, and were in the process of

developing a firm-wide transition plan.

• Major challenges cited by AIs in preparing for the transition included:

i. the lack of standard and consistent

fall-back languages for adoption by the

industry;

ii. insuff icient liquidity for products

referencing ARRs; and

iii. the lack of w ell-established term

structures for ARRs.

• These challenges are not unique to the Hong Kong market and, as explained below, are being addressed by authorities and leading organisationsoverseeing the transition.

The updates on international and local developments include:

• The UK Financial Conduct Authority issued a statement in March pointing out that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, notwithstanding the Covid-19 outbreak.

• New issuance and trading volume of products referencing ARRs have continued to increase, thanks to the initiatives undertaken by authorities and industry organisations to promote the use of ARRs in financial contracts.

• In Hong Kong, the Working Group on Alternative Reference Rates formed under the Treasury Markets Association

(TMA) has been following up on issues that need to be addressed locally (e.g. taxation). The TMA has developed a dedicated web page containing a collection of useful information about the benchmark reform, aiming to help local market participants prepare for the transition.

Key Takeaways

The HKMA will continue to use the survey to monitor the banking sector’s preparation for the transition and hence, AIs should keep their transition plans updated to demonstrate progress to the regulator.

AIs should also continue to closely monitor international and local developments relating to the benchmark reform, leveraging the resources available on the TMA’s web page and other sources. They should take these developments into account in updating their own transition plans. Specifically, AIs should prepare to confirm their adherence to the ISDA Protocol that incorporates fall-backprovisions for LIBOR once it is published.

Recommended Reading

Reform of interest rate benchmarks circular

Results of Survey on Reform of Interest Rate Benchmarks for Q4 2019 and Latest Developments in Benchmark Reform and Transition to Alternative Reference Rates

HKMA circular on reform of interest rate benchmarks

Ilka VazquezPartner

+852 2289 6565 [email protected] c.com

Amy YeungPartner

+852 2289 [email protected] c.com

Ian FarrarPartner



Regulatory Measures


Regulatory Measures


Regulatory Measures




https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200423e1.pdf

https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200423e1a1.pdf


ARRC recommends a spread adjustment

methodology for cash products

Follow ing its consideration of feedback received

on its public consultation, the ARRC is

recommending a spread adjustment

methodology based on a historical median over

a f ive-year lookback period calculating the

difference betw een USD LIBOR and SOFR. For

consumer products, the ARRC is additionally

recommending a 1-year transition period to this

f ive-year median spread adjustment

methodology. The f ive-year median spread

adjustment methodology matches the

methodology recommended by the International

Sw aps and Derivatives Association (ISDA) for

derivatives and w ould make the ARRC’s

recommended spread-adjusted version of

SOFR comparable to USD LIBOR and

consistent w ith ISDA’s fallbacks for derivatives

markets.

The ARRC w ill release a more detailed f inal

recommendation of the spread adjustment

methodology for cash products.

IASB proposes further amendments to IFRS

Standards in response to interest rate

benchmark reform

The International Accounting Standards Board

(Board) has proposed the follow ing

amendments to IFRS Standards to assist

companies in providing useful information to

investors about the effects of interest rate

benchmark reform on f inancial statements:

• Modifications: a company w ould not

derecognise or adjust the carrying amount of

f inancial instruments for modif ications

required by interest rate benchmark reform,

but w ould instead update the effective

interest rate to reflect the change in the

interest rate benchmark;

• hedge accounting: a company w ould not

discontinue its hedge accounting solely

because of replacing the interest rate

benchmark if the hedge meets other hedge

accounting criteria; and

• Disclosures: a company w ould disclose

information about new risks arising from the

interest rate benchmark reform and how it

manages the transition to alternative

benchmark rates.

ISDA announces preliminary results of

consultation on pre-cessation fallbacks for

LIBOR

The initial results indicate a signif icant majority

of respondents are in favor of including both

pre-cessation and permanent cessation

fallbacks as standard language in the amended

2006 ISDA Definitions for LIBOR and in a single

protocol for including the updated definitions in

legacy trades. A f inal report analyzing the

consultation results and information on next

steps w ill be available in the coming w eeks.

Key Takeaways

• The ARRC’s recommendations largely align

the spread adjustment methodology for cash

products w ith that proposed by ISDA for

derivatives. One notable difference comes in

the recommendation for a one-year

transition period for consumer products,

intended to provide a glide path to smooth

the change in the rate over a year.

• IASB’s proposed amendments - Companies

should take the opportunity to start planning

and preparing for relief now by analysing the

draft to identify any unresolved issues or

complexities that might influence specif ic

business models. Understanding industry

view s and concerns might be valuable as

w ell. The quicker a f irm can understand how

the Exposure Draft w ould apply to more

complex areas of its accounting, the sooner

it can identify any practical issues and begin

assessing solutions. Financial reporting

teams should provide “rules of the road”

guidance to legal, treasury and business

units tasked w ith changing LIBOR related

contracts. Similarly, f inance teams should

also stay close to the broader company-

f irmw ide LIBOR transition program in order

to ensure that changes to hedges or contract

modifications made to loans, bonds, leases,

and other products fall w ithin the guardrails

of the provided relief.

• ISDA pre-cessation fallbacks - The inclusion

of pre-cessation triggers as standard

language solidif ies the expected timing of

the publication of ISDA’s protocol, w hich is

likely to arrive in Q3 of this year. It also

eliminates potential complications

associated w ith the inclusion of pre-

cessation triggers on an opt-in basis, w hich

might have led to an increased need for

bilateral negotiations betw een parties

making different choices. The inclusion of

pre-cessation provisions effectively provides

the Financial Conduct Authority (FCA) w ith a

tool to trigger the cessation of LIBOR, and

the FCA is unlikely to hesitate in availing

itself of that tool should it deem LIBOR no

longer representative.

LIBOR Reform Updates

Ilka VazquezPartner

+852 2289 6565 [email protected] c.com

Amy YeungPartner


Ian FarrarPartner



Regulatory Measures


Regulatory Measures


Regulatory Measures




Pw C · 12

Joint SFC, HKEX and FSR consultation conclusions on the model for an uncertificated securities market

On 8 April, the SFC, Hong Kong Exchanges and Clearing Limited (HKEX) and the Federation of Share Registrars Limited (FSR) jointly released consultation conclusions on a proposed operational model for implementing an uncertificated securities market (USM) in Hong Kong.

The consultation was triggered by market concerns that the operational model proposed earlier (i.e. the 2010 model) would compromise some of the settlement efficiencies enjoyed by the market and have a significant impact on participants’ funding needs. The model put forward in the consultation aims to address these concerns while still offering investors an option to hold securities in their own names and without paper

The proposed operational model will:

• enable securities to be moved into and out of the clearing and settlement system much more efficiently and cost effectively than today;

• address concerns about settlement efficiencies being compromised, and the potential impact on market participants’ funding needs; and

• result in less market disruption and costs as it builds on existing processes, operational flows and infrastructure.

The SFC, HKEX and FSR will further develop the model and the regulatory framework to support it with a view to implementing the USM regime from 2022.

SFC Report on Leveraged Foreign Exchange Trading Activities Carried Out by Licensed Corporations

The SFC released its Report on Leveraged Foreign Exchange Trading Activities Carried Out by Licensed Corporations which summarises the findings of a survey of the leveraged foreign exchange trading (LFET) activities conducted by 32 firms licensed for Type 3 regulated activity between 1 January 2018 and 31 December 2018.

Key findings of the survey include:

• In 2018, the turnover in LFET market was HK$1,844 billion and over 99% was attributable to rolling spot forex contracts. Turnover was relatively low for more complex forex products such as options and forward contracts, which may be difficult for retail investors to understand.

• All LFET products were traded on an over-the-counter basis.

• Of the total 15,096 active LFET clients reported by the brokers surveyed, 98% were retail investors.

• More than 60% of the LFET clients of a sample of brokers made net trading losses in LFET.

The report also highlights some expected regulatory standards and good industry practices observed on customer due diligence, handling of client orders, conflicts of interest and information for clients. LFET brokers are expected to review their policies and controls to ensure compliance with the expected regulatory standards by 1 January 2021.

Amendment to Mutual Recognition of Funds (MRF) between Netherlands and Hong Kong

The SFC and the Autoriteit Financiële Markten (AFM) signed a Memorandum of Understanding concerning Mutual Recognition of Covered Funds and Management Companies and related cooperation (Memorandum) on 15 May 2019 (as amended from time to time).

In the latest amendment issued on 17 April, the Memorandum provides a recognition of asset managers as well as a framework for mutual recognition of recognised funds to be offered to the public in both markets.

IA Premium levy rate to be adjusted to 0.085% on 1 April 2020

In accordance with the schedule set out in the Insurance (Levy) Order under the Insurance Ordinance (Cap. 41), starting from 1 April 2020, the premium levy rate will be adjusted to 0.085% of the insurance premium per policy year, with the levy cap set at $85 for life insurance policies and $4,250 for general insurance policies.

Except for certain policies (Reinsurance business, policies underwritten by authorized captive insurers, and marine, aviation and goods-in-transit business are exempt from the levy) that are exempt from the levy by law, policy holders of all new or in-force life insurance policies and general insurance policies (such as travel, motor, property and household insurance) have to pay the levy along with their premium payment. The IA collects the premium levies from policy holders via the insurance companies.

Regulatory Updates New sletter — April 2020

Other Regulatory Updates


Regulatory Measures


Regulatory Measures


Regulatory Measures




Pw C · 13Regulatory Updates New sletter — April 2020

Glossary

AI Authorised Institutions IFRS International Financial Reporting Standard

AML Anti-Money Laundering IOSCO International Organization of Securities Commission

BC Basel Committee IR-1 Interest Rate Risk Management

BCBS Basel Committee on Banking Supervision IRR Interest Rate Risk

CFT Counter-Financing of Terrorism IRRBB Interest Rate Risk in the Banking Book

CG-1 Corporate Governance of Locally Incorporated Authorized Institutions LC Licensed Corporation

FATF Financial Action Task Force LIBOR The London Inter-bank Offered Rate

FinTech Financial Technology MAS Monetary Authority of Singapore

FMCC Fund Manager Code of Conduct MRF Mutual Recognition of Funds

FI Financial Institutions MoU Memorandum of Understanding

FSB Financial Stability Board RO Responsible Officer

HKMA The Hong Kong Monetary Authority RE-1 Recovery Planning

IA The Insurance Authority SFC The Securities and Futures Commission

IAF Internal Audit Function SFO Securities and Futures Ordinance

IC-1 Risk Management Framew ork SPM Supervisory Policy Manual

IC-2 Internal Audit Function

ICO Initial Coin Offering


Regulatory Measures


Regulatory Measures


Regulatory Measures




Documents

Financial Services Risk and Regulation · the impact of the coronavirus disease (Covid-19) on the global banking system. In line with this revised timeline announced by the GHOS,