To ensure the continued smooth operation of the interbank market given current economic conditions, the Hong Kong Monetary Authority (HKMA) has rolled out measures to assist the banking industry in managing liquidity. In its recent circular setting out such measures, the HKMA has noted occasional tightness in the Hong Kong dollar money market, caused principally by fluctuations in demand and supply of funding, seasonal factors as well as the recent strain in USD funding.

The measures encompass the following three main aspects:

Liquidity Facilities Framework

The HKMA has clarified the three main operational parameters of the Standby Liquidity Facilities (SLF) within the Framework, which should enable banks to readily use the SLF to enhance their day-to-day liquidity management.

  • Tenor: Funding under the SLF is normally provided for a term of up to one month, however the HKMA is now prepared to consider automatically rolling over funding for an additional term (or additional terms) to meet longer-term funding requirements of individual authorized institutions (AIs).
  • Pricing: The HKMA will set the prices for SLF at levels that will help to reduce market volatility.
  • Collateral: There is a wide scope of assets eligible for use as collateral for term repo under the SLF and this is not limited to High Quality Liquid Assets (HQLA) (as defined under the Banking (Liquidity) Rules[1] (BLR)).

Further details can be found in the Annex to the HKMA’s circular.

Federal Reserve’s Temporary FIMA Repo Facility

On 31 March 2020, the Federal Reserve announced the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets. As one of the FIMA account holders, the HKMA can enter into repurchase agreements with the Federal Reserve and temporarily exchange US Treasuries held by the HKMA for US dollars, which can then be made available to AIs in Hong Kong.

The HKMA is in the process of developing a mechanism for AIs to obtain US dollar liquidity from the HKMA after the FIMA Repo Facility has come into operation. The FIMA Repo Facility will last for at least six months commencing from 6 April 2020, with operational parameters currently being clarified between the HKMA and the Federal Reserve.

Supervisory expectation on the use of liquidity buffers

Utilisation of liquidity buffers under the LCR and LMR regime

The HKMA has reminded AIs that the stocks of liquid assets built up under the liquidity coverage ratio (LCR) and liquidity maintenance ratio (LMR) regimes are designed as a buffer for meeting liquidity demand during times of financial stress.

AIs are permitted to use their liquidity buffers to meet their liquidity demand and support business activities (provided that circumstances warrant this under the BLR). The HKMA considers that this is aligned with the enhanced regulatory liquidity framework policy objectives, and will accept an AI temporarily operating with a lower liquidity ratio as a result of using liquidity buffers.

In particular, a Category 1 institution is entitled to monetise its HQLA under certain circumstances[2] 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 accommodates there being temporary fluctuations in the ratio, so long as the monthly average ratio remains above the minimum requirement.

Operational readiness

AIs should put in place operationally efficient internal policies and procedures for using the HKMA’s liquidity facilities, especially the SLF, to ensure that facilities can be accessed promptly. The Monetary Operations Division of the HKMA will reach out to individual AIs to conduct drills for accessing the SLF, in order to determine compliance with the supervisory expectation.

In terms of the liquidity buffers under the LCR and LMR regimes, AIs should ensure that they have the necessary flexibility built in to their internal processes to match the flexibility embedded in the regulatory liquidity framework, in order that they can efficiently use the liquidity buffers when necessary. The HKMA intends to contact individual AIs to understand their internal processes and emphasises that it is prepared to extend the maximum degree of flexibility under the existing regulatory framework in response to the current economic climate.

A copy of the circular can be found here.

[1] Cap. 155Q.

[2] Rule 6 of the BLR.