The prospects for an orderly resolution will be seriously undermined if a failing financial institution (FI)’s counterparties terminate their contracts with the failing FI on a mass scale solely because of the entry into resolution by the FI or the exercise of resolution powers on the FI. For this reason, the Financial Institutions (Resolution) Ordinance (FIRO) contains provisions that prevent certain default event provisions from being triggered solely by the entry into resolution or the exercise of resolution powers when the substantive obligations provided for in the relevant contract continue to be performed. Furthermore, a resolution authority is empowered by the FIRO, subject to certain conditions being met, to impose a temporary stay on termination rights, for up to two business days.
However, where a contract is governed by non-Hong Kong law, there are uncertainties as to whether a court in a non-Hong Kong jurisdiction would give effect to a stay on termination rights imposed by the Monetary Authority under the FIRO unless the law of such jurisdiction expressly recognises the Monetary Authority’s action. These uncertainties have been identified as a barrier to resolvability internationally by the Financial Stability Board (FSB). To address this issue, the “Principles for Cross-border Effectiveness of Resolution Actions” published by the FSB in November 2015 suggests, among other things, the adoption of a contractual approach to support cross-border enforceability of resolution actions such as stays on termination rights.
The Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights—Banking Sector) Rules (Stay Rules) came into effect on 27 August 2021. The HKMA is currently consulting the industry on a chapter on the contractual recognition of suspension of termination rights to be included in the code of practice issued by the Monetary Authority under the FIRO.