HKMA’s new steerage covers points with benchmark reform referring to the definition of capital, market danger, counterparty credit score danger, liquidity and operational danger.
The HKMA (Hong Kong Financial Authority) has printed new benchmark reform steerage on points referring to the definition of capital, market danger, counterparty credit score danger, liquidity and operational danger.
The steerage is according to the BCBS (Basel Committee on Banking Supervision) FAQs about prudential points referring to benchmark reforms printed on 5 June, and comes quickly after the HKMA set out new milestones for Hong Kong banks of their LIBOR transition programmes.
Definition of capital: Amendments to the contractual phrases of capital devices is not going to set off a reassessment of whether or not they meet minimal maturity and name date necessities, or whether or not they’re nonetheless eligible as regulatory capital, if such amendments are solely for the aim of implementing benchmark price reforms.
Market danger: When conducting the RFET (danger issue eligibility take a look at) – which require actual price observations and ample market liquidity that may not be obtainable in new benchmark charges – banks may embody historic costs of the previous benchmark price for as much as one yr after its discontinuation when conducting the true price remark take a look at.
The previous benchmark may even be used when calculating capital necessities beneath the revised IMA (inner models method), the place benchmark charges are required to calculate market danger and anticipated shortfall throughout a historic burdened interval.
Counterparty credit score danger: For one yr after an previous benchmark price is discontinued, banks may disregard any transitional illiquidity of collateral and OTC by-product transactions referencing a brand new benchmark price when figuring out whether or not the collateral is illiquid collateral and whether or not the OTC by-product transactions can’t be simply changed.
Liquidity: When an HQLA instrument referencing an previous benchmark price is being changed with an equal sort of instrument referencing a brand new benchmark price, banks can have in mind anticipated will increase available in the market liquidity of the substitute instrument when figuring out whether or not it qualifies as HQLA.
Operational danger: Operational danger losses from benchmark reform don’t fulfil the standards for exclusion from the operational danger cost based mostly on OPE25.30 of the BCBS’s consolidated framework. Due to this fact, banks ought to make the required preparations for the transition to various charges to minimise operational danger losses.
The HKMA’s full round is offered right here.
Banks, BCBS, benchmark reform, Capital, Collateral, counterparty credit score danger, HKMA, HQLA, Inner Models, Libor, Liquidity, Market Liquidity, Market Threat, Operational Threat, OTC Derivatives, Regulatory Capital, RFET